Re: Do I-Bonds pay compounded interest?
You can read the fine details on the treasury web site, but basically ibonds and tips work almost identically...the principal amount is adjusted to cpi periodically and the fixed interest rate is then paid on that varied capital rate. When you cash the bond, you get the cpi adjusted principal back.
I think the two ways tips and ibonds differ is that with tips you can have negative cpi reduce your principal value if there is deflation, and you have to pay taxes on the inflation adjustment every year. So if we have a long period of deflation, you may lose principal and get less back at the end than you paid for the bond. Ibonds assure you will get at least your original principal back, and all earnings are tax deferred until the bond matures or you cash it in.
You get ~2% for tips today vs 1% for ibonds...in other words, you get a 2x premium for paying the tax annually and taking a risk on deflation.
At least thats my recollection...owners can say for sure. I dont own either.
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.