I Bond Rate for May 2011 through October 2011- 4.60 %

by RC on May 2, 2011

May  2011- I Bond Earnings Rate 4.60 %, Fixed Rate 0.0 %

The I Word, or inflation has finally reared its ugly head according to the CPI, which is reflected in the 6 month offering period for I bonds, with a semi-annual inflation rate of 2.30%, and an overall return of 4.60% for at least 6 months. The fixed portion of the i bond is again at 0.0%. I bonds are now more attractive for those looking for a decent interest rate and inflation protection as an investment. I bonds for the last 6 months only paid 0.74%, so this represents quite an increase.

I bonds must be held for at least 1 year. But if you buy them at the end of the month, you get credit for the whole month, effectively making it a minimum of 11 month holding period. If you cash I bonds in before 5 years, you lose 3 months’ worth of interest.  But at the current rate of 4.60%, losing 3 months interest would still net you appx. 3.45% after a year, better than you can get just about anywhere else I know of at the moment.

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 4.60 % earnings rate for I bonds bought from May 2011 through October 2011 will apply for their first six months after issue. The earnings rate combines a 0.0% fixed rate of return with the 2.30% semi-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, but since it is  0.0, it doesn’t really come into play for this 6 month offering period.

Here’s how the composite rate for I bonds issued May 2011 – October 2011 was set:

Fixed rate = 0.00%

Semiannual inflation rate = 2.30%

Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]

Composite rate = [0.0000 + (2 x 0.0230) + ( 0.0000 x 0.0230)]

Composite rate = [0.0000 + 0.0460+ 0.0000000]

Composite rate = 0.0460

Composite rate = 4.60%

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

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