I-Bonds and good math and a little help and Thank you

[jedithunder]

I want to purchase I-bonds per Clark. But I am fuzzy about the math. Could we use $100 as a number to help my understanding? And cover this like I am in first grade.
Please attempt to respond in simple but not condescending language as I am here to learn?




Questions on timing

I can only cash the bond out after one year. Is this Correct?
And because of the pre-five-year minimum penalty, I will have to wait one year and three months to realize the total amount available for the year of gains. Is this Correct?


Questions on Interest

A bond of $100 + 7.12% of interest would pay out 107.12 at the end of 15 months?


Thank you to all for your time and help with this

[terran]

It sounds like you generally understand everything (at least as far as what I know of I Bonds), except one thing: the interest rate adjusts every 6 months based on inflation, so we don't yet know what the interest rate will be for the second or third 6 months of your proposed 15 month holding period.

[EvenSteven]

It sounds like you generally understand everything (at least as far as what I know of I Bonds), except one thing: the interest rate adjusts every 6 months based on inflation, so we don't yet know what the interest rate will be for the second or third 6 months of your proposed 15 month holding period.

In addition to the variable interest rate part changing every six months, the example you have looks like it is compounding once every 12 months. I bonds compound every six months.

[Watchmaker]

For the first 6 months, the interest would be 7.12%. After 6 months you would have accrued $356.00 in interest. At that point there is a new interest rate (let's assume it is now 5%). For the next 6 months you accrue $258.90 more in interest (5% on $10,356.00 for 0.5 years), giving you a total of $10,614.90. There would then be another new interest rate at that point, but if you cash out after 15 months, you will be penalized the interest for those three months anyway, so you would get $10,614.90. This is less than your number, because I assumed a lower interest rate for the 2nd 6 month period (which I think is likely). If the interest rate was identical for the two 6 month periods, the calculation you showed is correct.