Please help me understand I bonds!

Q. I bought I bonds in September 2003 and I don't understand how they work. How much am I earning? Is this a good investment or should I try to do better with a CD or money market account?

A. You shouldn't buy any investment you don't understand, but since you already own the savings bonds, you should take some time to learn about them before deciding to cash them in. The No. 1 thing to know is that the interest rate you earn changes every six months. The I bond rate has two parts. One part is determined by when you bought the bond and remains fixed for the life of the bond. In your case that part is 1.1%. The other part of the interest rate is based on the inflation rate, which will change every May and November.  According to the savings bond Web site, your bonds currently are earning a composite (the two parts considered together) interest rate of 4.22%. That makes them a decent, but not stellar investment. An additional benefit is that taxes on the earnings are deferred until you redeem the bonds. A drawback is that if you cash them in before five years, you will be charged a three-month interest penalty.

There is no one perfect investment for the future. If you think inflation is going to accelerate, I bonds look good. If you think interest rates are going to decline, long-term CDs look good. If you think interest rates are going to rise, money market funds look good.