This is a government bond that has two components which are adjusted every six months: the fixed portion and the inflation adjusted portion. The fixed portion remains the same over the life of the bond while the inflation adjusted part is changed every 6 months to the current rate of inflation. I-bonds serve as a hedge against inflation.
You must hold I-bonds 1 year but you can hold them up to 30 years. If you sell the I-Bond after holding it 1 year, but before 5 years are up, there is a 3 month interest penalty for the withdrawal.
I-Bonds have the following characteristics:
Federal Guarantee I-Bonds are completely guaranteed by the United States government. You earn a set variable interest rate which changes and is set every 6 months which varies depending on inflation.
Taxes Advantage You have deferred federal taxes until you sell the bonds. Also, the gains are completely state tax free! If you are in a high tax state, this is important. If you have children, I-bonds can be federal tax exempt if you fall into set income limits and use the proceeds for college expenses.
You can get more information on I-Bonds at I-BondRate.com