Home » Bookkeeping articles » Lets try to clarify how an I Bonds interest is calculated Treasury Inflation-Protected Securities

Lets try to clarify how an I Bonds interest is calculated Treasury Inflation-Protected Securities

July 22, 2024
Bill Kimball

Investors are limited to purchasing a maximum of \$10,000 in electronic I Bonds per year for each Social Security Number (the minimum purchase amount is \$25). An additional \$5,000 may be purchased as paper I bonds. This cap may be restrictive for investors looking to allocate a larger portion of their portfolio to this type of investment. The change in the inflation rate is applied to the bond every six months from the bond’s issue date. The actual rate of interest for an I bond is calculated from the fixed rate and the inflation rate.

Calculating the Rate on Series I Savings Bonds

The \$25 bond value is always rounded to the nearest penny. Thus, a \$5000 bond must always have a value that is a multiple of \$2.00. Want to know how today’s rate compares to further-back periods of your I bond?

Purchase Limits and Denominations

Another key advantage of I Bonds is their ability to protect purchasing power against inflation. The variable inflation rate component of the bond’s interest rate is adjusted semi-annually based on changes in the CPI. This means that as inflation rises, the interest rate on I Bonds also increases, helping to preserve the real value of your investment over time. Series I Bonds, also known as I Bonds, are a type of savings bond issued by the U.S. Treasury that offer investors a unique combination of safety and protection against inflation.

He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. To see what your paper Series I bond is worth, use our Savings Bond Calculator.

How We Find the Best Savings and CD Rates

If anyone has further advice on this I Bond calculation, send it my way in the comments section below. Here it is, with a \$1,000 investment shown because TreasuryDirect’s calculator is for “paper I Bonds only” and won’t allow an investment input of more than \$5,000. WILL NOT provide accurate results for the value of electronic bonds. If you hold a bond in electronic form, log in to TreasuryDirect to find the value. The computation engine will generate both a graphical and tabular presentation of the holding’s value and performance over time.

1. While both bond types are backed by the full faith and credit of the U.S. government and offer a safe, low-risk investment option, there are several key differences between the two.
2. Want to know how today’s rate compares to further-back periods of your I bond?
3. EE Bonds, with their fixed interest rate and guaranteed doubling in value after 20 years, may appeal to investors with a longer investment horizon who prioritize predictable returns.
4. You will probably have to enlarge the chart to view a particular row.

You must have used the savings bond to pay for qualified educational expenses such as tuition or books to qualify for savings bond tax exemption. As an example, we can calculate the current rate of 6.89% using the 0.40% fixed rate and 3.24% inflation rate. But inflation has cooled from a high of 9.1% in June 2022 to 3.5% in the March 2024 reading, which was released on Wednesday. As inflation has come down, so too have I bond rates, making them not as competitive a savings vehicle as they previously were. Under the cash method, tax is only applied when the bonds are redeemed.

Series I Bonds offer a unique investment opportunity for those seeking a low-risk, inflation-protected investment backed by the U.S. government. With a combination of a fixed rate and a variable inflation rate, I Bonds can help preserve purchasing power over time, making them an attractive option for risk-averse investors. Ultimately, the decision to invest in I Bonds should be based on an individual’s financial goals, risk tolerance, and overall investment strategy. Series I bonds are non-marketable bonds that are part of the U.S. Treasury savings bond program designed to offer low-risk investments.

Because inflation can go up or down, we can have deflation (the opposite of inflation). Deflation can bring the combined rate down below the fixed rate (as long as the fixed rate itself is not zero). However, if the inflation rate is so negative that it would pull the combined rate below zero, we don’t let that happen. A \$5000 bond is worth 200 times what a \$25 bond is worth; a \$100 bond is worth 4 times what a \$25 bond is worth. If you have a \$80 electronic bond at TreasuryDirect, it is worth 3.2 \$25 bonds.

To create an inventory, enter information about your paper bonds, one bond at a time, into the Calculator. Treasury are always paid right away on the first day, and not again until the first of the next month. So once you’ve collected interest for a particular calendar month, say on the upcoming May 1, there’s no reason or additional earnings to be gained by holding the funds any longer during May. I bonds are so named because they’re calibrated to inflation. If you now own I bonds, there’s a good chance you bought them within the last two and a half years when decades-high U.S. inflation pushed I bond returns to their highest level ever. Investors should carefully consider their financial goals and risk tolerance when deciding whether to include I Bonds in their portfolio.

However, your effective composite rate changes six months after your purchase date. If the market rate changes earlier, your bond rate will catch up after the half-year period. This interest rate will be valid for six months after buying the bond. Afterward, the variable rate will adjust to the current market inflation rate. The table below highlights the historical inflation rates. When considering investing in U.S. savings bonds, investors often compare Series I Bonds and Series EE Bonds.

While both bond types are backed by the full faith and credit of the U.S. government and offer a safe, low-risk investment option, there are several key differences between the two. Like the fixed rate, the inflation rate changes every six months on May 1st and November 1st. However, the variable rate is different for the entire bond lifetime. The inflation rate has a 2x multiple, affecting the i bond rate more significantly than the fixed rate.

For example, if you purchased a bond in November 2022 with a fixed rate of 0.40%, it would stay the same throughout the 30-year maturity. The Federal Reserve is committed to bringing inflation closer to 2% from its current level above 3%, and if it’s successful, I bond rates will continue to soften. A CD you lock in today, however, guarantees its rate for the full duration of the certificate. 5.27% is the composite interest rate for I bonds issued November 1, 2023 to April 30, 2024. Inflation adjustments are made 2x each year, on May 1 and November 1.

WILL NOT create a savings bond based on information you enter. EE Bonds, with their fixed interest rate and guaranteed doubling in value after 20 years, may appeal to investors with a longer investment horizon who prioritize predictable returns. Both EE and I Bonds must be held for a minimum of one year before they can be redeemed, and if they are redeemed within the first five years, investors forfeit the most recent three months of interest. I Bonds must be held for a minimum of one year before they can be redeemed, which may not be suitable for investors who require more flexible access to their funds. Furthermore, if I Bonds are redeemed within the first five years, investors will forfeit the most recent three months of interest as a penalty.

But the inflation rate could increase if inflation picks up again; the six-month inflation rate reached a high of 2.85% in November 2005. The interest you receive from i bonds is subject to income taxes. However, in most cases, you can avoid state income taxes on the interest earned. Some states offer tax breaks to people who invest in savings bonds, while others do not.

For more about how we choose the best rates, read our full methodology. You choose whether to report each year’s earnings or wait to report all the earnings when you get the money for the bond. If you have a Series I electronic bond, you can see what it is worth in your TreasuryDirect account.

You can look up a specific bond there and see its entire history. You will probably have to enlarge the chart to view a particular row. We announce the fixed rate every May 1 and November 1. That fixed rate then applies, for the life of the bond, to all I bonds that we issue during the next 6 months. The interest rate on a Series I savings bond changes every 6 months, based on inflation.

The table below lays out the various 6-month rates each I bond has or will earn. With Wednesday’s Consumer Price Index (CPI) in hand, Investopedia can now calculate what the next 6-month interest rate will be for existing I bonds, which will be officially unveiled by the U.S. Every May 1 and Nov. 1, the Treasury announces new rates that will be good for the following six months. Both I Bonds and EE Bonds have purchase limits, but they differ slightly. Investors can purchase up to \$10,000 in electronic I Bonds per year for each Social Security Number, with an additional \$5,000 in paper I Bonds if using their tax refund. EE Bonds have an annual purchase limit of \$10,000 in electronic form per Social Security Number, but there is no additional purchase limit for paper EE Bonds.

Therefore, a taxpayer that holds a bond for seven years before selling it will only be taxed at the time the bond is sold. Using the accrual method, on the other hand, taxes on the imputed interest earned are applied every year. The fixed rate that we set each May and November applies to all bonds we issue in the 6 months following the date when we set the rate. Every 6-month rate for all bond issue dates going back to 1998 can be found in the U.S. I Bonds are often favored by investors seeking protection against inflation, as their variable interest rate helps preserve purchasing power over time. They may be particularly attractive during periods of high inflation.