I have a similar question over at the 'Raffe, so forgive me if this seems repetitive. But I need repetition to get some simple financial concepts pounded into my head.
If you’ve been reading, you can buy I Bonds through Treasury Direct.gov that are paying 9.62% at the moment. The full amount of interest will be paid after five years. You must hold them for at least one year to be paid interest, but will be dinged three months’ worth of interest if you cash in the bond before the five years are up.
I want to buy a bond and cash it in after one year. My husband is hesitant; he says the 9.62% (or whatever it is after it re-sets every six months) is spread out over five years, i.e., you only get 1/5 of 9.62% every year. He says if I bought one and cashed it in after one year, I’d only get 1/5 of 9.62% minus the three months’ worth of interest.
A financial person I trust says that my take is correct, that the interest rate is paid yearly, not divided up over five years. Can anyone corroborate this?
By the way, thanks for nothing, Schwab and Wells Fargo. I know you don’t stand to make any profit because I’d be buying from Treasury Direct.gov, but I’d have thought a years-long relationship with you might induce you to give me some basic financial advice on this.
I believe your understanding is mostly correct. The current return is annualized, but adjusts at 6 months intervals. But if you sell before 5 years you forfeit the final 3 months of interest. So if you bought a $10k bond that’s at 9.62%, stays at 9.62% for a second 6 months then you sell at 12 months, once you give back 3 month’s gain you’d net $721 (I think: the bond return may have compounded at 6 months, so you’d net slightly more - $751 according to my napkin).
I found Treasury Direct’s email and fired off this question to them. We’ll see if I get a reply in the next couple of days. I imagine they’re inundated right now with people fleeing the volatile stock market looking for stability and return.
You are correct. The 9.62% is the annualized rate over the next six months. It’s set to the inflation rate (since the baseline “real” rate is zero), so every six months, it will reset to whatever the inflation rate is, floored at zero. That is, if inflation goes negative, you’ll earn nothing over six months, you won’t lose money.
Yep, that’s an annual rate. If that interest rate is cumulative over 5 years, then there are much better investments. The whole point is inflation protection.
I bought some last month, when the rate was 7.x% Some friends suggested I wait until this month, when I’d get the 9.x%. This made no sense to me, unless I was going to sell early. But since this is for long-term inflation hedging, I’ll still get the 9.x% for 6 months, but it will just start in October. At some point in the future (hopefully soon), the rate will fall again, but I’ll benefit from having the higher rate still in place for 5 more months. Ultimately, I’ll end up in the same place, except with 1 more month of interest.
I just bought my I Bond. Hopefully at the six month mark they don’t cut it back too much, or at all. That depends on inflation and the future stock market. In my case, it’s just diversification. Whatever it earns, it’s a heck of a lot better than my savings account.
And that’s why I, and a lot of other people, are recommending them for people who want to do medium- or long-term investing.
I bought most of mine in the 00s, back when I was working full-time, and they were “paying” 0% for a while,so while you’ll never lose money, they may not always be profitable. I learned about them on the old Clark Howard radio show.
I’m sure you’re thinking of SPDR with 20% growth per annum over the last 5 years. However I Bonds are the safest possible investment and under your scenario and with compounding has a 12% annual yield. Not a bad way to diversify.
The OP’s question was whether the 9.62% rate is an annualized rate, or a 5-year rate. We’ve agreed that it is the former. If it were the latter, there are better risk-free investments. I’m just talking Treasury bonds, and nothing to do with stocks, ETF’s or anything else like that.
5 years of 9.62% interest compounded semiannually.
Your multiplier is (1 + 0.0962 ÷ 2) ^ (2 x 5) = 1.0481^10 = 1.599658… But let’s call it 1.60
That means over 5 years you earn a total of 60% on your money so 12% simple interest per annum.
Just picked up another $500 worth. That puts me at $2500 total with $2000 on the old cycle. And $500 of that is paper because I got it with my tax refund. Since you have to wait at lest a year before cashing them out, I started picking them up early as soon as I heard about them.
Thanks. FYI, that 9.62% isn’t fixed for the life of the bond – it will vary every six months with inflation. If we have 10% inflation for the next five years, that would be bad.
Definitely. I-Bonds are a great deal right now – real rates for 5-year treasuries are negative, whereas the I-Bonds have a real rate of zero. Savings accounts have very negative real rates.
I never disagreed with you and I never said it was a 5 year rate. I merely pointed out that according to YOUR scenario that the 9.62% annual rate will continue for 5 years it is still a good way to diversify your portfolio. I even showed that SPDR has been a better investment over the last 5 years than 12% yield.
OK since everyone apparently thinks I don’t know how I bonds work.
FTR before I invested in them back in February 2022 I researched them and knew a priori:
The rate is based on inflation. That is what the “I” stands for.
The rate is quoted as an annualized amount, but changes on the first business day in April and October.
Your bond compounds every six months at that rate at that time.
Your rate only changes at compounding, meaning the bonds I bought in February are still earning 7.12% and it won’t change to a 9.62% yield until August 1st.
You must hold them 1 year period. If held less than 5 years you lose the last 3 months of interest.
Based on #s 4 and 5, and that people know the new upcoming rate in March & September, there is a strategy that you only buy in those months since you know exactly what the rates will be for the minimum holding time of the bond.