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Savings-Bonds-Alert: Yield versus Interest Rate

Tuesday, February 22, 2005

Yield versus Interest Rate

For the life of me, I can't understand what the difference is between a Savings Bond's yield and interest rate. Can you help? Tom's response The yield is what the bond has earned over its entire life expressed as an annual rate. The interest rate is what the bond is earning in its current six-month rate period. If the interest rate paid by a Savings Bond never changed, the yield and interest rate would be almost exactly the same (there would be a small difference caused by the interest compounding twice a year, while the yield is standardized to show the rate with once-a-year compounding). But Savings Bonds rates change every six months, which leads to the difference between yield and interest rate.


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