I Bonds Interest Rates – How Are They Calculated?

Understanding I bonds interest rates is not always easy, but these bonds do offer interest rates which are indexed to the inflation rate and that can make them a good choice for a number of investors. These are not really considered government short term bonds, because of the penalty applied if you do not keep the bond for a minimum five year period although they can be redeemed after the initial twelve month period with the penalty charge applied. I bonds interest rates are a combination of two other rates that are used together, the fixed interest rate and the inflation rate.

The government bonds interest rate, both the fixed rate and the inflation indexed rate, is set twice a year in May and November by the Secretary of the Treasury. While the fixed rate will always be either zero or a positive number, the inflation rate can be a negative percentage. The inflation rate is set using any relevant changes in the Consumer Price Index for all Urban Consumers. I bonds interest rates are called composite earnings rates, and this is the combined fixed and inflation rates together. The composite earnings rates for these long term government bonds change every six months, when the new rates are released by the Secretary of Treasury.

The formula involved to determine the I bonds interest rates is somewhat complex. The composite earnings rate is equal to the fixed interest rate plus two times the semiannual inflation rate, and then the results of this is added to the results received from multiplying the fixed rate with the semiannual inflation rate. The formula for determining interest on these savings bonds appears like this:

Fixed Rate + (Semiannual Inflation Rate x 2) + (Semiannual Inflation Rate x Fixed Rate) = Composite Earnings Rate

Because the I bonds interest rates are indexed to inflation the interest that you receive can vary, depending on the economy and the rate of inflation.