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How should you select the right savings bonds?

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Quick Answer

The choice between investing in EE bonds and I bonds depends on whether investors are purchasing the bonds for growth or as a hedge against inflation, according to Kiplinger. I bonds pay a lower fixed interest rate than EE bonds but also pay an additional variable rate based on inflation.

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Full Answer

The additional, inflation-based variable rate of the I bond makes it an effective hedge against inflation, notes Kiplinger. The I bond's variable rate rises and falls according to the rate of inflation, which results in I bonds paying the current rate of inflation plus their fixed rate. For example, if the fixed rate of an I bond is 1.5 percent and the current inflation rate is 10 percent, the I bond's yield is 11.5 percent, 1.5 percent above the inflation rate. Compared to EE bonds, I bonds pay higher overall interest rates in times of high inflation and lower overall interest in times of low inflation.

EE bonds pay a fixed rate of interest for the 30-year life of the bond, explains Kiplinger. EE bonds are sold at 50 percent of their face value. In contrast, I bonds are sold at their face value. Income from both bonds is exempt from state and local taxes. The bonds can be purchased directly from the U.S. Treasury, either online or through payroll deductions.

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