All about Savings Bond rate periods
Tuesday, January 25th, 2005
Categorized as: Savings Bond interest rates
There are lots of confusing things about Savings Bonds interest rates, but King of the Misunderstood Hill is confusion about rate periods.
Every Savings Bond has a series of six-month rate periods that begin with the month in which the bond is issued. Today's Savings Bonds pay interest for 30 years, so they have 60 rate periods.
What's confusing is that the Treasury announces new interest rates for Savings Bonds in May and November, but the announced rates don't apply to a specific Saving Bond until its next rate period begins, which is zero (for bonds purchased in May or November) to five (for bonds purchased in April or October) months later.
If you have a copy of my book, Savings Bond Advisor, look up rate periods in the index. In addition to a bit longer explanation, there's a full-page diagram that will help you understand these relationships.
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I'm a little confused about savings bond interest rates. My wife just bought our daughter a $50 I-bond, which I understand is earning 3.36% interest during its first 6-month rate period.
I also understand that the interest compounds every 6 months.
But does that mean that it earns 3.36% on $50 every month, with all that interest adding together? That seems too good to be true.
Or does it earn 3.36% for the 6-month period combined — 0.51% each month? That's not nearly as good, but it projects out to a very respectable annual yield.
Or does it earn 3.36% annualized, but paid monthly (0.28% each month, 1.68% for the 6-month rate period)? This one, obviously, is my least favorite!
Thanks,
Josh
Josh - it's your least favorite. Interest rates are always best expressed as annual rates. This particular rate only applies for six months; there's more detail on how I bonds work here.
Tom Adams