Confounding compounding calculations

Thursday, December 8th, 2005
Categorized as: Current value of a US Savings BondSavings Bond interest rates

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.

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FDIC Insured Certificates of Deposit can pay 1 or 2% more than savings bonds when held for a similar length of time. See top CD Rates Below:


On April 5th, 2007 Rich said:

Another inexplicable factor is that the delta in interest earned from month to month can decrease even though the interest rate does not.


$10,000 I Bond purchase Aug 2003
Earnings rate is 4.52% (Nov06)
Feb 07 calculated interest earned is $1412
Jan 07 calculated interest earned is $1392
Interest increased by $20 between Jan & Feb (1412-1392)

Same $10,000 I Bond purchase Aug 2003
Earnings rate is 4.12% (Nov05)
Feb 06 calculated interest earned is $848
Jan 06 calculated interest earned is $808
Interest increased by $40 from between Jan & Feb (848-808)

On April 5th, 2007 Tom Adams said:

Rich – what’s inexplicable to me is the interest rates you show in your comment.

While the amounts you show are correct – and are the total amount of interest that I bond had earned up to that date – the rates you show for those months aren’t correct.

In Jan 06 this I bond earned 4.70%. In Jan 07 it earned 2.11%. That’s what accounts for the 2006 interest being twice as much as the 2007 interest.

I think you may misunderstand how I bond interest rates are determined.

Tom Adams

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June 1, 2010

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Virtually every question about Savings Bonds has been asked and answered on this site multiple times. Use the search feature (see the box in the gray area near the top of this page) or the detailed menu on the lower part of the home page to find the information you're looking for. If you have a copy of Savings Bond Advisor, you can ask me a question here.

Tom Adams

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