This blog has moved. Click here to go to the new blog.

Savings-Bonds-Alert: Savings Bond interest rate calculations

Tuesday, January 25, 2005

Savings Bond interest rate calculations

I used the Savings Bond Calculator to determine the interest earned by a $10,000 EE bond issued in May 2004. It was $60 which, in 8 months, is 1.8% interest, not the 3.25% listed for that bond. What is the explanation? Tom's response During its first six-month rate period, the annual rate for the 5/04 EE was 2.84%. During its second six-month rate period, the 5/04 EE will earn 3.25%. Moreover, the values shown for bonds less than five years old don't include the last three month's of interest, because of the early-redemption penalty. So instead of showing 8 months worth of interest, it shows 5 months at the 2.84% annual rate. For historical reasons, the Treasury first calculates the interest for a hypothetical $25 EE bond. If there was such a thing, you'd pay $12.50 for this bond, so the math looks like this: 12.50 * .0284 * (5/12) = .15    (value * rate * months/year) Your bond is 400 times larger than a $25 bond, so after the redemption penalty, you earned $60. (10000/25) * .15 = $60 The Savings Bond Calculator doesn't show the actual (as opposed to redemption) value of your Savings Bond. However, ongoing interest rate calculations are based on the actual value, not the redemption value, as you can see in this calculation: For the first six months you earned: 12.50 * .0284 * (6/12) = .18    (value * rate * months/year) For the next two months you earned: (12.50 + .18) * .0325 * (2/12) = .07 For a total of: .18 + .07 = .25, or $100


Post a Comment