I-Bonds. Can anyone shed any light on these for me?

[amarowsky]

I was talking to a pretty wealthy guy at my work the other day. We were talking about finance and he brought up I-bonds which he said were "inflation bonds". He told me these were readily available at any bank in a varying number of denominations from $25-1000+.
According to him they average 4.8 interest and they "mature" after 5 years. He said if you wish to sell them before thier maturity date you only suffer a "3-month of interest penalty". He also said to check the price of the bonds, you can simply track the serial number on the bond certificate to the dept. of treasury or something.
What im asking is if people know is this information is true, their opinions on such bonds, and any other suggested bonds.

I've never personally dealt with bonds because I'm still learning and scratching the surface of personal finance, and this is basically me looking to broaden my options for investing. Anyinformation or websites linking to different bonds and rates would be greatly appreciated

[noppenbd]

There were a number of posts about I-bonds back in May when the new fixeed rates were announced. With I-bonds you get a fixed rate + an inflation component rate. I think the rates are announced once or twice a year. Currently the fixed rate is 0%, and the inflation rate is running at 4.8 (annualized)%. Since the fixed rate does not change for the life of the bond, while the inflation rate changes every 6 months, they are not considered a good buy at this time, since you are locking in 0% for the life of the bond.

[amarowsky]

when you say fixed rate of 0% and inflation rate or 4.8% that means the I-bonds only pay off the fixed rate? Does that mean If I were to buy one it would not be gaining any interest? Or does that mean i am just loosing out on the fixed rate they normally offer that is >1%? And not to sound dumb but with a fixed rate does that add to the rate of inflation, can u give a rough example with some numbers ?

[noppenbd]

Check out the Treasury's website:

Individual - I Savings Bonds Rates & Terms

Basically my understanding (although I have never bought one) is that the total return is the sum of the fixed rate and the inflation rate. The confusing part is the inflation rate is expressed as a 6-month percentage, so you have to double it to get the "APR". Let's say you bought a bond on May 1st 2008 (fixed rate=0%, inflation rate=2.42% for 6 months). So for that 6 months you would earn 2.42% (which is equivalent to 4.84 APR).

Then let's say on November 1st 2008, the inflation rate goes to 1.50%. They may change the fixed rate too, but that would only affect people who buy new bonds after that date. So for you for the next 6 months you would earn 1.50% (which is 3.0% APR). And so on, the inflation rate will fluctuate every 6 months.

If you had bought the bonds before May 1st 2008, when the fixed rate was 1.20%, you would be getting APR of 1.20%+inflation component for the life of the bond. For the period May 1st 2008 to November 1st 2008 you would be getting 6.04% APR!

[amarowsky]

ohhhh ok, so it (fixed rate) add's into the 6 month inflation. Thank you for that info and for the further clarification.

And i am lookin for some passive conservative money making idea's if you dont suggest a I-bond (at this time ) is there any other bond or idea you would suggest?

[noppenbd]

There are some online checking accounts that pay 6%. You have to do 10-12 debit card transactions a month and use online banking. Some of them have a few other requirements. Check out:
Bank Reward Programs for online checking accounts updated daily by Money-Rates.com