Rating I-Bonds

Q: I’ve been purchasing Series I savings bonds from the U.S. Treasury to balance out the more aggressive/speculative investments in my portfolio. How would you rate I-Bonds as an investment?
— H. Shepherd, Via the Internet

A: As you have applied them, Series I savings bonds are an excellent investment. They can work well as a portion of your total bond allocation in a well-diversified portfolio.

Also called inflation-adjusted savings bonds, I-bonds are a very safe investment because market volatility doesn’t affect your principal or earned interest. They offer a moderate yield, plus they provide a hedge against inflation. In markets where inflation is expected to rise, I-bonds get a semiannual rate adjustment based on the consumer price index, which ensures that their fixed rate of return does not erode. With analysts predicting rising inflation in 2006, I-bonds become an even more attractive investment.

I-bonds have another benefit: The interest they earn becomes tax-free if they are redeemed to pay for qualified higher education expenses, such as tuition and fees at colleges and vocational schools. The interest on I-bonds can also be tax-free if they are rolled into a Section 529 plan for your education or that of a spouse or dependent.

An individual can only purchase $30,000 worth of I-bonds a year. They are issued at full face value in denominations from $50 to $10,000. You can purchase I-Bonds online at www.savingsbonds.gov.