Definition
A U.S. savings bond whose interest rate combines a fixed rate for the life of the bond with an inflation adjustment that resets every six months. Bought directly from the Treasury with an annual purchase cap per person, it cannot be redeemed in the first 12 months, and cashing out before five years forfeits the last three months of interest. Interest is exempt from state tax and federally tax-deferred until redemption.
Why it matters
I bonds are one of the few assets whose return is contractually tied to inflation, making them a purchasing-power shield for medium-term savings. The caps and lockups are the trade: the first-year lockup makes them wrong for money needed soon, and the purchase cap means a large cash pile cannot move in all at once.
Example
A saver buys $5,000 of I bonds to protect cash earmarked for a home purchase four years out. When inflation spikes, the composite rate rises at the next reset; when it cools, the rate falls. Redeeming at year four costs the final three months of interest, a modest toll for four inflation-protected years.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.