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I've done some research and can't seem to find an answer to my question, so I hope someone can educate me. I have several I bonds and am considering purchasing another. I see that the current composite rate is 4.6%, which beats any 5 year CD and sounds pretty good. What I don't understand is why the I bond I purchased in 10/2001 is currently only paying 3.75%. Why wouldn't it at least be paying 4.6%? The 3.75% rate is what is shown when I go to Treasury Direct to calculate the current value and rate of my bonds. I'm probably missing something obvious so I'm hoping someone here can explain this mystery to me.
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It is because I bonds are composed of two separate rates: an I Bond fixed rate and a, I Bond variable rate. All I Bonds use the same variable rate, but the fixed rate depends on when the I bond was purchased. -
May - October 2001 I Bond fixed rate is 3.00%
Fixed rate = 3.00%
Semiannual inflation rate = 2.30%
Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]
Composite rate = [0.0300 + (2 x 0.0230) + (0.0300 x 0.0230)]
Composite rate = [0.0300 + 0.0460 + 0.00690]
Composite rate = [0.0829000]
Composite rate = 0.0829
Composite rate = 8.29%
Someone please check my math -- never my strong point
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OK, I think I've figured it out. My I Bond was purchased in October 2001. I Bonds that are purchased in October have the November inflation rate applied from April 1 until October 1. The November 2010 inflation rate was 0.37, and when you apply the I Bond composite rate calculation using that inflation rate, you come up with a composite rate of 3.75. As of October 1, the composite rate will go up to around 8% because it will then use the May 2011 inflation rate of 2.3. Pretty confusing....Comment
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