Navigating iBonds: Risks and Principal Considerations

No, you typically cannot lose principal in a U.S. Series I Savings Bond (iBond) unless you redeem it before it reaches its maturity date or you spend the proceeds from the bond in a way that causes its value to decline in real terms due to inflation. iBonds are considered one of the safest investments available because they are backed by the U.S. government.

Here's how iBonds work regarding principal protection:

1. Inflation Adjustment: iBonds have a fixed interest rate and an inflation rate that is adjusted semiannually based on changes in the Consumer Price Index for All Urban Consumers (CPI-U). This means that the bond's value increases with inflation, and the principal amount adjusts accordingly to keep pace with rising prices.

2. Fixed Interest Rate: iBonds also offer a fixed interest rate, which remains constant for the life of the bond. This fixed rate, combined with the inflation rate, determines the overall interest rate for the bond.

3. Maturity Date: iBonds have a minimum holding period of one year, during which they cannot be redeemed. However, they can be redeemed after one year if necessary, although there may be penalties if redeemed within the first five years.

4. No Market Risk: Unlike other investments like stocks or bonds traded on secondary markets, iBonds do not fluctuate in value with market conditions. Your principal is secure as long as you hold the bond until maturity.

5. Interest Earnings: iBonds earn interest for up to 30 years from the issue date. During this time, the value of the bond will grow with inflation, and you'll earn interest on the adjusted principal.

6. Deflation Protection: In the rare event of deflation (a decrease in the CPI-U), the bond's inflation rate can drop to zero, ensuring that your principal is not eroded by falling prices.

In summary, iBonds are designed to protect your principal investment from inflation and market fluctuations. While you have the option to redeem them early, you may forego some interest earnings if you do so within the first five years. Generally, iBonds are considered a low-risk, inflation-protected savings option for investors looking to preserve their purchasing power over the long term.