November 2008 I Bond Rate- 5.64% Total, 0.70% Fixed

Because November 1st fell on a weekend, we’ve had to wait until today, November 3rd, to get the new I bond rates for the next 6 months.

November 2008- I Bond Earnings Rate 5.64%, Fixed Rate 0.70%

The earnings rate for Series I Savings Bonds is a combination of a fixed rate, which applies for the life of the bond, and the semiannual inflation rate. The 5.64% earnings rate for I bonds bought from November 2008 through April 2009 will apply for their first six months after issue. The earnings rate combines a 0.70% fixed rate of return with the 4.92% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U). The fixed rate applies for the 30-year life of I bonds purchased during this six-month period. The CPI-U increased from 213.528 to 218.783 from March through September 2008,
a six-month increase of 2.46%.

Here’s how the composite rate for I bonds issued Nov 2008 – Apr. 2009 was set:

Fixed rate = 0.70%
Semiannual inflation rate = 2.46%

Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]
Composite rate = [0.0070 + (2 x 0.0246) + (0.0070 x 0.0246)]
Composite rate = [0.0070 + 0.0492 + 0.0001722]
Composite rate = [0.0563722]
Composite rate = 0.0564
Composite rate = 5.64%

Check out my article on I bonds if you are trying to decide if I bonds are a good option for you.

Some of the positive features of I bonds include:

I bonds are currently returning 5.64%, a pretty good rate considering ING, for example, is returning 2.75%
The interest on I bonds can be taxed deferred, meaning they do not have to be reported on a yearly basis (as savings account interest would be)
The interest from I bonds are tax free if used for education.

Things to consider:

I bonds must be held 1 year (really 11 months if you buy at the end of the month)
If you cash I bonds in before 5 years time, you give up 3 months interest as a penalty
Only the fixed portion is guaranteed-the inflation indexed portion is variable and changes every 6 months-and theoretically could go to 0%.

Thoughts on November 2008 rate:

The rise in the fixed portion from 0.0% in April 2008 to 0.7% is a better deal than last April, but with the fed lowering interest rates again recently, it is hard to say if inflation will stay up or will start to decrease, lowering the overall rate. They do look more attractive than in April, and if the rate stayed at 5.64% for a year (although it would change in April 2009) and you cashed in after 1 year and payed the 3 month penalty, you would still be looking at a 4.23% return, which is not too bad compared to high interest savings accounts, most of which offer around 3% +/- these days.