### 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

## 0 Comments:

Post a Comment