I Bonds Interest Rates

If you were researching low risk investments with liquidity and on the higher side and interest rates enough to keep the investment growing despite inflation, you must have come across the term 'I Bonds'. I Bonds interest rates are high enough to retain investment growth values despite the value erosion faced due to inflation. It is this 'I bonds interest rate' factor that draws investors into investing in I Bonds, over other instruments like EE/E Series Bonds and TIPS (Treasury-Inflation Protected Securities). Let us begin this 'I Bonds interest rates' article by first updating our Series I Savings Bond, or just plain 'I Bond' info.

What are I Bonds
The US Treasury came up with an 'I Savings Program' in September 1998, with the purpose of creating instruments that protect bond investors from inflation erosion. I Bonds are considered as long term investments in the bonds market and the interest rates for I Bonds are declared twice a year, every year, specifically on the 1st of May and November. I Bonds are issued with certain specific rules and one of the most important one from an investor's point of view is the one that says, 'an I Bond can never lose value and hence it can never carry a 0% interest'. Now that the concept of I Bonds is clearer, let us move on to some important I Bond features.

Features of I Bonds
Some of the salient features of I bonds are listed below.

• I Bonds start earning their interests from the very first day of their issuing months. I Bonds are accrual type financial instruments and their interest accrues on them and is only encashed when the bond is liquidated or redeemed. When the bond matures, it is worth the face value plus the interest accrued on it over the investment period.
• I Bonds can be redeemed or liquidated anytime after the compulsory lock in period of 12 months. But if they are redeemed anytime before they are 5 years old, the three most recent month's interest is deducted from the amount that you will earn from them. This forfeited amount forms the only penalty for liquidating an I Bond before 5 years are up.
• I Bonds are always sold at face value, i.e. they are never issued at a discount or a premium. The bond price (price at which you buy the I Bond) equals the bond denominations, i.e. $ 100 will get you a $ 100 I Bond.
• Like most US Treasury instruments, I Bonds can grow in value for a maximum of 30 years. The earnings on I Bonds are inflation indexed and so do not undergo abnormal value changes due to the adverse effects of inflation over this time span. I Bonds post their final interest earnings on the last day of the final maturity month, after which they stop earning any interest.
• Entities eligible to invest in I Bonds are individuals, corporations, public and private organizations and even fiduciaries. As an individual, you can own an 'I Bond' only if you have a Social Security Number, and even minors have this privilege.
• All interest earned on I Bonds is taxable under the Federal Income Tax laws but this tax can be deferred until the I bond is either redeemed or liquidated. Special tax benefits under the Education Savings Bond Program can be availed on I Bonds if the bond holder qualifies for them.
• As I Bonds are backed by the US Government, they carry negligible risk of default. Due to this very reason, they are preferred over stocks, corporate bonds and other equity instruments.
• In an effort to guarantee a real return to investors, I Bonds adjust their interest rates every 6 months, according to the latest inflation figures provided by the CPI-U. We will learn more on I Bonds interest rates in the coming paragraphs.

I Bonds and Interest Rates
The only way that I Bonds can guarantee a real income is by incorporating the inflation rates somehow into their interest rate calculation formula. Hence, the I Bonds interest rate is nothing but a combination of two separate rates - a fixed interest rate and a variable inflation rate. Let us learn more about the two components of I Bonds interest rates before we move on to the I Bonds interest rate calculation formula.

Fixed Component of I Bond Interest Rates
The fixed rate component of the I Bonds interest rates, is announced twice every year (May and November) and is a rate that is fixed for the life of any and all I Bonds issued during the 6 months after the announcement. For example, for any bond issued between November 2009 and April 2010, the fixed rate (which will not change during the entire life of the I Bond) is 0.30%. This rate is to change on 1st of May 2010 and will apply to all I Bonds issued for 6 months after the announcement. The Secretary of the Treasury or the Secretary's designee usually determines this fixed rate and it is always greater than 0, even in deflationary conditions.

Inflation Component of I Bonds Interest Rate
This rate is also announced every May and November and is based on the inflation figure changes provided by the CPI-U (Consumer Price Index for all Urban Companies). This rate may or may not be above 0%, as it depends on the condition of the economy. In deflationary times, this rate may be negative and the only complication in I Bond Interest rates comes due to this factor. What if the deflationary rate is higher than the fixed rate or offsets it so completely that the I Bonds interest rate comes to 0%. As this is not possible as per the conceptual terms of I Bonds, in the event that such a thing happens, the redemption value of I bonds is considered to be the one that it had in the previous month. Semiannual inflation rates are used for the purpose of calculation of the composite I Bond interest rates.

Composite I Bonds Interest Rates
There is a fixed formula for the calculation of the composite I Bonds interest rate and it includes both, the fixed and the inflation components mentioned above. The I Bonds interest rate formula is as follows:

Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]

Various online websites make this calculation easier by providing online savings bond calculators. I Bond calculators help in calculating the exact I Bond investment values by taking the prevailing, current I Bonds interest rates into account. Hope this I Bond Interest rates article was of some help to you.