A:

The term "I Bond" is industry lingo for inflation-linked savings bonds issued by the U.S. Treasury. You've probably heard of investment opportunities in government-issued securities before - think T-bills or Treasury bonds. I bonds are very similar in nature: backed by the monetary power of the U.S. government, they have virtually zero default risk and therefore provide a safe investment opportunity for risk-averse investors or those who have a shorter time horizon.

However, there is an added level of safety built into a U.S. Treasury I bond. As the name suggests, the securities are protected against inflationary changes while they are held by the investor, as their interest rates adjust to changes in the inflation rate. This is entirely different from typical fixed-income securities, where an investor purchases a bond that pays a specified dollar value in interest at regular intervals - with that type of bond, an investor may lose out if the inflation rate rises after he or she purchases the security.

Because most government-issued securities are considered risk-free, they usually offer lower interest rates than other investments. Nevertheless, an investor concerned with minimizing risk may opt to purchase an inflation-protected security such as the I bond, guaranteeing him or herself a specific real rate of return over the course of his or her investment period.

I bonds can be purchased by anyone over the age of 18 with a valid social security number. They are available electronically on the U.S. Treasury's website, TreasuryDirect. They can also be redeemed online whenever the owner wishes, but if they are redeemed prior to being held for at least five years, the owner will forfeit interest payments for the three most recent months. I bonds are sold at face value and can be purchased in increments as low as $25, with an individual investor being allowed to purchase a maximum of $30,000 in a given year.

Find out how allocating your tax refund to I Bonds can affects you; check out How do I get a split tax refund?

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