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I Bond Calculations and earnings rate
The I Bond earnings rate...
is a combination of two separate rates: a fixed
rate of return and a semiannual inflation rate. Each May and November,
the Treasury announces a fixed rate of return that applies to all I Bonds
issued during the six-month period beginning with the effective date of the
announcement, May 1 or November 1. The fixed rate for any given
I Bond remains the same for the life of the bond.
Also, every May and November, the Treasury announces a semiannual
inflation rate based on changes in the Consumer Price Index for all
Urban consumers (CPI-U). The semiannual inflation rate announced in May is
a measure of inflation from the previous October through March; the rate
announced in November is a measure of inflation from the previous April through
September. The CPI-U is published monthly by the Department of Labor's Bureau of
Labor Statistics. The semiannual inflation rate is then combined with the fixed
rate of an I Bond to determine the bond's earnings rate for the next six
months.
Here's how we set the composite rate for I bonds issued May 2002 - Oct 2002:
Fixed rate = 2.00%
Inflation rate = 0.28%
Composite rate = [Fixed rate + 2 x Inflation rate + (Inflation rate X Fixed rate)] X 100
Composite rate = [0.0200 + 2 x 0.0028 + (0.0028 X 0.0200)] X 100
Composite rate = [0.0200 + 0.0056 + 0.000056] X 100
Composite rate = [0.025656] X 100
Composite rate = 0.0257 X 100
Composite rate = 2.57%
A New Risk
with "I" Series Bonds
- . . . One fact which is not too well publicized is what can
happen to "I" bond interest rates in a period of DEFLATION. If the CPI-U goes
negative, (the rate of inflation is less than zero), the INFLATION RATE FACTOR will be
SUBTRACTED from the FIXED INTEREST RATE portion of the rate. In this case, the combined
new rate for the upcoming six month interest earnings period may actually BE LESS THAN THE
FIXED INTEREST RATE established when the "I" bond was issued. In fact, if the
DEFLATION rate is severe, the computed "I" bond interest rate could actually
become a NEGATIVE number. So much for the FIXED INTEREST RATE remaining constant until the
bond is redeemed.
-
- . . . However, a government spokesman has stated that in no
event would the "I" bond interest rate drop below 0%, and that any interest
earnings accumulated up to that time would be protected. "I" bonds would just
not increase in value during that particular six month interest earnings period.
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