I previously wrote about how my I-Series Savings Bonds' interest rates will change effective May 1. Since I'm new to purchasing I-Bonds, I wasn't quite sure how the rates re-set and I had couple of doubts.
The interest rate on I-Bonds are a bit confusing to calculate since it is a composite rate of a fixed rate + a variable rate. The variable rate based upon the CPI data for the past 6 months.
In an inflationary economy, the variable rate will be positive, so it would increase the composite rate. Conversely, in a deflationary economy, the variable rate will be negative, thereby reducing the composite rate below the fixed rate.
For those of you who are mathematically inclined, official formula is:
Composite Rate = Fixed Rate + (2 x Semiannual Rate) + (Fixed Rate x Semiannual Rate)
May Semiannual Rate= (CPI-U (current March) div. CPI-U (last Sept.)) - 1
November Semiannual Rate = (CPI-U (current Sept.) div. CPI-U (last March)) - 1
Update: Effective 5/1/09, the fixed rate is 0.1% and the semiannual rate is -2.78%.
My doubts included:
- Do the I-Bonds' rates re-set every 6 months on a rolling basis from the date of purchase? (It was my understanding that it did.)
- In a deflationary economy where the variable rate is significantly less than the fixed rate, will the I-Bond continue to accrue the fixed rate or will the composite interest rate be 0%? (Under such a scenario, it was my understanding that the rates would be 0%.)
I checked my TreasuryDirect account this morning and my questions were answered.
It appears that the I-Bonds' rates do re-set every 6 months on a rolling basis from the date of purchase. If you look at the chart below, the I-Bonds I purchased between November '08 and April '09 have the same fixed rate of 0.7% and are subject to the same variable rate.
If the I-Bonds re-set all at once, they should carry the same interest rate. However, the only rate that changed was the I-Bond that I purchased in November '08 (i.e., the I-Bond I purchased 6 months ago). So it appears that the I-Bond that I purchased in December '08 will re-set next month, so on and so forth.
Additionally, it appears that in a deflationary economy where the variable rate is significantly less than the fixed rate, the I-Bond will accrue 0%, not the fixed rate. (Bummer.)
I created a spreadsheet that helps me keep track of the past interest rates as well as to "predict" what the future interest rates will be.
I'm glad I purchased in April the I-Bonds I intended to purchase the next 6 months. Based upon my spreadsheet, the I-Bonds I purchased in April will accrue 5.64% for the next 6 months and 0% the following 6 months.
Had I purchased $25 every month starting in May per my original plan, I would've likely earned 0% for the next 12 months. For once, it appears I hedged correctly. Hurray!
Sorry for the boring discussion on a Friday. Hope you all have a great weekend!