With interest rates on the rise, many Americans are wondering what their investment strategy should be. A safe (i.e., a virtually risk-free) and increasingly popular way to keep pace with the cost of living is to purchase inflation-indexed government bonds. These so called I-bonds pay competitive interest rates and increase in value when the CPI rises. These bonds can be held for up to 30 years.
Suppose you purchased an I-bond for $10,000 and held it for 11 years, at which time you received $20,000 for the bond. Inflation has averaged 3% per year during this 11-year period. What real annual rate of return did you earn on your inflation-adjusted I-bond? Is it really competitive?