I-Bond Question

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delrinson
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I-Bond Question

Post by delrinson »

I bought a $10,000 I-Bond in September 2021. The rate at that point was 3.54%.

It is showing a current value of $10,028. What accounts for the $28? The monthly interest would be $29.50. I know the interest doesn't accrue until six months....so I assumed it was going to say $10,000 until the 6 month mark, at which point $177 would be added to the value of the bond.

Thanks in advance for any clarification anyone is able to offer.
abner kravitz
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Re: I-Bond Question

Post by abner kravitz »

It reflects your monthly interest, with a 3 month lag to reflect the 5 year rule (you lose 3 months of interest if you don’t hold for 5 years). The interest accrues monthly, but compounds every 6 months.
Last edited by abner kravitz on Wed Jan 19, 2022 4:13 pm, edited 1 time in total.
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samsoes
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Re: I-Bond Question

Post by samsoes »

Interest accrues monthly. It is compounded every six months. There is a three-month penalty before the five year mark. Some bond pricing tools show the accrued interest on a month-to-month basis, and you have to go back three months to get the value for bonds less than five years old.

Please review the Wiki: https://www.bogleheads.org/wiki/I_savings_bonds
"Happiness Is Not My Companion" - Gen. Gouverneur K. Warren. | (Avatar is the statue of Gen. Warren atop Little Round Top @ Gettysburg National Military Park.)
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delrinson
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Re: I-Bond Question

Post by delrinson »

Thanks....and just found this: "Note: If you use TreasuryDirect or the Savings Bond Calculator to find the value of a bond less than five years old, the value displayed reflects the three-month penalty; that is, the amount of the penalty has been subtracted already."
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samsoes
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Re: I-Bond Question

Post by samsoes »

delrinson wrote: Wed Jan 19, 2022 4:14 pm Thanks....and just found this: "Note: If you use TreasuryDirect or the Savings Bond Calculator to find the value of a bond less than five years old, the value displayed reflects the three-month penalty; that is, the amount of the penalty has been subtracted already."
This is a nifty tool: http://eyebonds.info/ibonds/index.html
But you have to account for the three-month penalty manually (go back three months from this month).
"Happiness Is Not My Companion" - Gen. Gouverneur K. Warren. | (Avatar is the statue of Gen. Warren atop Little Round Top @ Gettysburg National Military Park.)
shess
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Re: I-Bond Question

Post by shess »

In addition to the 3-month lag, apparently I-bond interest is calculated in a kind of convoluted manner. The gist of it is that your $10k bond is like 400 $25 bonds, and the interest is rounded to the penny WRT that $25 unit, so interest on your $10k bond moves in $4 increments. Poking around eyebonds.info, it's like $10,028 (+$28), then $10,060 (+$32), then $10,088 (+$28), then $10,116 (+$28), then $10,148 (+$32) and so on.
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delrinson
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Re: I-Bond Question

Post by delrinson »

Interesting information...thanks!
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HueyLD
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Re: I-Bond Question

Post by HueyLD »

delrinson wrote: Wed Jan 19, 2022 4:08 pm I bought a $10,000 I-Bond in September 2021. The rate at that point was 3.54%.

It is showing a current value of $10,028. What accounts for the $28? The monthly interest would be $29.50. I know the interest doesn't accrue until six months....so I assumed it was going to say $10,000 until the 6 month mark, at which point $177 would be added to the value of the bond.

Thanks in advance for any clarification anyone is able to offer.
All calculation starts with $25.

25 x 3.54% / 12 = 0.07 (rounded to two decimal places)

(10000/25) x 0.07 = 28.
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samsoes
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Re: I-Bond Question

Post by samsoes »

HueyLD wrote: Wed Jan 19, 2022 4:34 pm
delrinson wrote: Wed Jan 19, 2022 4:08 pm I bought a $10,000 I-Bond in September 2021. The rate at that point was 3.54%.

It is showing a current value of $10,028. What accounts for the $28? The monthly interest would be $29.50. I know the interest doesn't accrue until six months....so I assumed it was going to say $10,000 until the 6 month mark, at which point $177 would be added to the value of the bond.

Thanks in advance for any clarification anyone is able to offer.
All calculation starts with $25.

25 x 3.54% / 12 = 0.07 (rounded to two decimal places)

(10000/25) x 0.07 = 28.
Gotta love government math!
"Happiness Is Not My Companion" - Gen. Gouverneur K. Warren. | (Avatar is the statue of Gen. Warren atop Little Round Top @ Gettysburg National Military Park.)
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ApeAttack
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Re: I-Bond Question

Post by ApeAttack »

samsoes wrote: Wed Jan 19, 2022 4:46 pm
HueyLD wrote: Wed Jan 19, 2022 4:34 pm
delrinson wrote: Wed Jan 19, 2022 4:08 pm I bought a $10,000 I-Bond in September 2021. The rate at that point was 3.54%.

It is showing a current value of $10,028. What accounts for the $28? The monthly interest would be $29.50. I know the interest doesn't accrue until six months....so I assumed it was going to say $10,000 until the 6 month mark, at which point $177 would be added to the value of the bond.

Thanks in advance for any clarification anyone is able to offer.
All calculation starts with $25.

25 x 3.54% / 12 = 0.07 (rounded to two decimal places)

(10000/25) x 0.07 = 28.
Gotta love government math!
https://youtu.be/L1eegVTwDS0
May all your index funds gain +0.5% today.
BrokerageZelda
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Re: I-Bond Question

Post by BrokerageZelda »

HueyLD wrote: Wed Jan 19, 2022 4:34 pm
delrinson wrote: Wed Jan 19, 2022 4:08 pm I bought a $10,000 I-Bond in September 2021. The rate at that point was 3.54%.

It is showing a current value of $10,028. What accounts for the $28? The monthly interest would be $29.50. I know the interest doesn't accrue until six months....so I assumed it was going to say $10,000 until the 6 month mark, at which point $177 would be added to the value of the bond.

Thanks in advance for any clarification anyone is able to offer.
All calculation starts with $25.

25 x 3.54% / 12 = 0.07 (rounded to two decimal places)

(10000/25) x 0.07 = 28.
(Because I want to prove to #Cruncher that I learned my lesson yesterday...)

The formula for I Bond interest is not a straight line; the ending value after six months can be calculated as if it were a straight line at half the annualized interest rate, but the payment of that interest each month is a simulation of interest that is compounded monthly, resulting in a curved path of values running very slightly below the straight line of constant interest between the first and last month.

Follow along here: https://eyebonds.info/ibonds/10000/ib_2021_09.html

Straight line interest (the wrong way) = starting value + (starting value x semiannual inflation rate/6 x number of months)
= $10000.00 + (10000 x (1.77% / 6) x number of months)
= $29.50/month, rounded to the nearest $4 because of the $25 reference value
September 1: $10000.00
October 1: $10029.50 ($10028)
November 1: $10059.00 ($10060)
December 1: $10088.50 ($10088)
January 1: $10118.00 ($10120) <-- too high
February 1: $10147.50 ($10148)
March 1: $10177.00 ($10176)

Simulated monthly compounding (the right way) = starting value * (1 + semiannual inflation rate) ^ (number of months/6)
September 1: $10000.00
October 1: $10000.00 * (1.0177 ^ 1/6) = $10029.28 ($10028)
November 1: $10000.00 * (1.0177 ^ 2/6) = $10058.66 ($10060)
December 1: $10000.00 * (1.0177 ^ 3/6) = $10088.11 ($10088)
January 1: $10000.00 * (1.0177 ^ 4/6) = $10117.65 ($10116) <-- correct
February 1: $10000.00 * (1.0177 ^ 5/6) = $10147.28 ($10148)
March 1: $10000 * (1.0177 ^ 6/6) = $10177.00 ($10176)

The simulated monthly compounding formula causes a 'dip' in the middle of the six months, which will usually result in a round-down in at least one month where you would expect a round-up.

If you just want a ballpark answer and don't want to do the hard math, use the straight line formula to calculate a constant payment and you'll never be more than $4 off. But this is why the eyebonds.info tables don't always match when you do that.
Last edited by BrokerageZelda on Wed Jan 19, 2022 10:47 pm, edited 1 time in total.
0505ch
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Re: I-Bond Question

Post by 0505ch »

Thank you, the above math is very helpful!
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