I Bond Rates for May 2010 through October 2010- 1.74% Total, Fixed Rate 0.20%

May 2010- I Bond Earnings Rate 1.74%, Fixed Rate 0.20%

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 1.74% earnings rate for I bonds bought from May 2010 through October 2010 will apply for their first six months after issue. The earnings rate combines a 0.20% fixed rate of return with the 1.54% 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.

This represents a drop from the last 6 month period (November ’09 through April ’10) in the fixed rate from 0.30% to 0.20%, and a drop in the semi-annual inflation rate from 1.53% to 0.77%.

Here’s how the composite rate for I bonds issued May 2010 – October 2010 was set:

Fixed rate = 0.20%
Semiannual inflation rate = 0.77%

Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]
Composite rate = 0.0020 + (2 x 0.0077) + ( 0.0020 x 0.0077)]
Composite rate = [ 0.0020 + 0.0154 + 0.0000154]
Composite rate = 0.0174154]
Composite rate = 0.0174
Composite rate = 1.74%

Since I bonds are tax-deferred, they can be an useful option to diversify your tax liabilities as part of your overall investment strategy.
As I have mentioned before, I bonds are also tax free if used for education, so they can be part of your education savings plan as well.