Risk and reward are intertwined - generally. For example, riskier wagers usually offer loftier returns than safer alternatives when investing in the stock market. Further, when investing in bonds, this trend continues. However, the risk-reward relationship doesn't always hold, and the most talked-about example as of late is the US Treasury I Bond.
What is an I Bond? Simply an I Bond is an I-Owe-You contract between the Treasury and yourself where the interest rate paid fluctuates based upon inflation, hence, why they are popular all of a sudden. With inflation at historically high levels, there has never been a better time to consider purchasing I Bonds. The rate for I Bonds issued in April are currently paying a 7.12% rate. It's projected to go even higher next month to something over 9% as macro-economic forces push prices ever higher.
Little risk
Since I Bonds are issued directly from the US Treasury, there is minimal risk of losing your money. After all, you would have to expect the Treasury to go under, which is exceedingly unlikely.
Further, because the government recognizes how great of a deal I Bonds can be, each individual is limited to purchasing up to $10,000 in I Bonds annually, either a one time purchase or purchases spread throughout the year. (If you receive a tax refund, you can purchase up to another $5,000 worth of I Bonds using these monies.)
How they work
With I Bonds, you purchase the bond for a face value of up to $10,000 through the Treasury's website.
Each month, the bond accrues interest based on a fixed and floating rate, the latter of which is determined by the adjusted inflation rate. Then, the interest you earn is added to the bond's value twice per year. Thus, this means that I Bonds receive compound interest.
However, you must hold your I Bonds for at least one year, but no more than thirty. If you decide to keep them for less than five years, you forfeit three months of interest - a small price for a stellar rate and immediate liquidity.
Interestingly, I Bonds are only taxed at the Federal Income Tax level and provide the option to be taxed annually, at maturity, or when you cash them.
Ready to buy?
At Lundeen Abrams Advisors, we believe that I Bonds present a unique opportunity at the moment given our rapid inflationary environment.
While limited in their purchasing increments, I Bonds can fit into various portfolios for those with contrasting needs.
So, if you are ready to purchase I Bonds, give us a call, and we would be happy to guide you through the process on the US Treasury website today.