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Series I Bonds Inflation Rate Update (Nov 2010)

Posted By Jim On 11/01/2010 @ 7:05 am In Investing | 1 Comment

With another September come and gone, it’s time to take a look at our good friend, the Series I savings bond. Savings bonds are a nice safe way to diversify your savings since they are backed by the full faith and credit of the United States. They won’t make you rich but they have a lot of nice benefits (deferral of gains, no state and local income taxes on the interest, and there is an exemption from federal taxes for educational use) that make them attractive. I wouldn’t put all of my money into bonds but a little bit is good as a safety net.

11/2/10 Update: The Treasury Department announced that the fixed rate component on Series I bonds will be 0.00% for bonds issued November 2010 through April 2011.

That being said, I like Series I bonds the most because they offer a protection against inflation. With the release of inflation figures in September, we can now easily calculate what the interest rate portion of the Series I Savings Bond will be this upcoming month. The September 2010 CPI-U was 218.439 and the March 2010 CPI-U was 217.631. This yields a semi-annual increase of 0.37%.

It’s difficult to predict what the fixed rate on the Series I bond will be but if we use the 0.2% for bonds sold between May 2010 and October 2010 [3], we find that the new rate will be:
Interest rate = Fixed rate + (2 x Semiannual inflation rate) + (Semiannual inflation rate x Fixed rate)
Interest rate = 0.002 + (2 x 0.00371) + (0.00371 x 0.002)
Interest rate = 0.0094

That means the interest rate on Series I bonds will be 0.94%. Remember, the fixed rate sticks with the bond so check your bonds to see what your fixed rate is (or use the Treasury’s historical rate list to find the date you purchased your bonds). I haven’t purchased Series I bonds since April 2008 and back then the fixed rate was 1.20%, before it fell to 0.00% for six months. Using this Series I bond interest rate calculator [4], I learn that my bonds will be earning 1.944 APY for six months. While it’s not as good as some of the best CD rates out there, it’s better than a savings account.

Do you have any savings bonds?

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