Confounding compounding calculations

How is the interest on Savings Bonds compounded? I've tried to apply the interest rate to the values in TreasuryDirect, but I never get the same answer the Treasury does.

Tom's response

There are three reasons it's difficult to figure out how the Treasury does the calculations. For some older bonds it gets even more complicated than this.

First is the early-withdrawal penalty. If you redeem your Savings Bonds before five years, you lose the most recent three months of interest.

Everywhere the Treasury shows the value of a Savings Bond, it's the value after deducting the penalty. This means there's never any confusion about the redemption value of a Savings Bond.

However, interest rate calculations are done using the true value of the bond, which isn't shown anywhere.

The second reason is that Savings Bond interest accrues (is added to the value of the bond for redemption calculations) monthly, but compounds (is added to the value of the bond for interest rate calculations) every six months.

Again, the Treasury always shows the redemption value, which typically isn't the value the interest rate calculations use. The price we pay for reliable redemption values is constant interest-rate calculation confusion.

The third reason is that many Savings Bond interest rates change every six months. To do the calculations over a long time period, you have to calculate each six-month rate period separately. And you have to remember the rates are expressed as annual rates, but in each six-month period you earn just half the annual rate.

Here's a sample of how Savings Bonds interest rate calculations are done.