question about I Bonds


J

Joe Smith

I have a general question about I bonds which hopefully someone here can
answer for me.

If I purchase some I bonds is the current rate fixed for the life of the
bond?

For example the current rate is 4.80%, if I get a $10,000 bond at that rate
will it always be that rate for as long as I hold the bond? Or is the rate
adjusted as interest rates go up/down?


Thanks in advance for any help...
 
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R

Rich Carreiro

Joe Smith said:
I have a general question about I bonds which hopefully someone here can
answer for me.

If I purchase some I bonds is the current rate fixed for the life of the
bond?
No.

The current *real return* is fixed for the life of the bond.
But since the APY of an iBond is a combination of the fixed
real return and the current CPI-U rate of inflation, the
APY of the bond will change every six months.
For example the current rate is 4.80%, if I get a $10,000 bond at that rate
will it always be that rate for as long as I hold the bond? Or is the rate
adjusted as interest rates go up/down?
No. The rate is adjusted as *inflation* rates go up and down. That's
why it's called an I(nflation-protected)-Bond.
 
M

Mark Freeland

See http://www.publicdebt.treas.gov/sav/sbirate2.htm

Joe said:
[...]
For example the current rate is 4.80%, if I get a $10,000 bond at
that rate will it always be that rate for as long as I hold the bond?
Or is the rate adjusted as interest rates go up/down?
Part of the rate is fixed (savings bonds purchased now have a fixed
component of 1.2%), and part is adjusted as *inflation* (not interest)
rates go up/down. The current inflation adjustment adds 3.6%, which is
how you get a total current rate of 4.8%.

That's an important distinction, because interest rates and the
inflation rate do not move in lock step. You may see, e.g. interest
rates on the 10 year Treasury drop, while I-Bond rates tied to inflation
rise (such as what happened in the past year, when the Treasury rate
dropped about 1/2%, while I-bonds are paying about 1 1/4 % more than a
year ago). Or vice versa.
 
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