An I-bond is a type of U.S. savings bond, a bond issued and backed by the U.S. government. The I-bond is an inflation protection bond, designed to shield investors from the negative effects of inflation. This is achieved by tying the interest rate to an inflation index, so that the return on the bond stays above the rate of inflation. It is an interest accrual bond, so the interest that it earns is added to the bond's value and when the bond is redeemed the investor receives the purchase price of the bond plus all the interest earned.

An I-bond is purchased at face value, meaning a $50 bond will cost the investor $50, and earns interest until it reaches maturity, thirty years after it is purchased. These bonds can be redeemed when they are twelve months old, however if they are cashed in during the first five years, the investor will forfeit the last three months worth of interest. In other words, if you cash in an I-bond that is three years, five months old, you will receive three years, two months worth of earnings.

There are two parts to the I-bond's interest rate: the fixed rate and the semi-annual inflation rate. Every May and November a fixed rate is announced and applies to all I-bonds purchased for the following six months. The fixed rate remains unchanged for the life of the bond. The inflation rate is based on the Consumer Price Index for all Urban Consumers (CPI-U) and is also announced every May and November.

I-bonds can be purchased through banks, internet banking systems and other financial institutions. They can be purchased in both paper and electronic forms. The Treasury Direct Web site, http://www.treasurydirect.com, is operated by the U.S. Department of the Treasury Bureau of the Public Debt and offers I-bonds for sale. I-bonds can be redeemed online or at most banks and other financial institutions.