Buying "Series I Savings Bonds" Between April 15 to April 30.

[jnw]

Is it true that the new rates for May 1st are announced around April 15th? 

And is it true if I bought say around April 20th, that I'd know the average interest gains I'd get for a full 12 months?

It's at 7.12% now.  So if I bought on April 20th, would I then be guaranteed 7.12% for the first 6 months of the bond, followed by another 6 months of the announced rate on April 15th?   Say it's 7.9%.   Would I then be guaranteed an average interest rate of   (7.12+7.9)/2 =7.51% for 12 months?

[FLBiker]

That jibes with my understanding.  We bought our first set of bonds just after the 7.12% was announced.  At the time, the rate was 3.54%.  So we're getting that for six months, then going up to 7.12%, then whatever comes next.  And we bought another set in Jan, currently at 7.12%.  And (as you may have read) there's a 3 month interest penalty for withdrawal within 5 years.  It seems that they way they do that is simply not to pay interest for the first three months (and then I imagine you get that paid in a lump when you hit 5 years).  I'm still a relative novice with these, but that's my experience thus far.

[jnw]

That jibes with my understanding.  We bought our first set of bonds just after the 7.12% was announced.  At the time, the rate was 3.54%.  So we're getting that for six months, then going up to 7.12%, then whatever comes next.  And we bought another set in Jan, currently at 7.12%.  And (as you may have read) there's a 3 month interest penalty for withdrawal within 5 years.  It seems that they way they do that is simply not to pay interest for the first three months (and then I imagine you get that paid in a lump when you hit 5 years).  I'm still a relative novice with these, but that's my experience thus far.

From what I've been told you only lose the interest on the last 3 months.  So say 2 years from now the inflation goes down to 1%.. and say the last 3 months you had it in there only got 1% interest.. if you canceled it, it wouldn't really amount to much of a loss.  At least you wouldn't lose 3 months of interest at 7.12%; you'd lose only 1/4th of 1% or 0.25% interest, from my understanding.

Question: do you lose the last 3 months of interest of the last compound, even if you are say 4 months into the next 6 month block, but 2 months before the subsequent compound?  Effectively losing 7 months of interest?

[NotJen]

From the TreasuryDirect site.  https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm

How do I bonds earn interest?

An I bond earns interest monthly from the first day of the month in the issue date. The interest accrues (is added to the bond) until the bond reaches 30 years or you cash the bond, whichever comes first.

The interest is compounded semiannually. Every six months from the bond's issue date, interest the bond earned in the six previous months is added to the bond's principal value, creating a new principal value. Interest is then earned on the new principal.

You can cash the bond after 12 months. However, if you cash the bond before it is five years old, you lose the last three months of interest. Note: If you use TreasuryDirect or the Savings Bond Calculator to find the value of a bond less than five years old, the value displayed reflects the three-month penalty; that is, the amount of the penalty has been subtracted already.

It will make more sense after 3 months when you start seeing the interest reflected in your account.  The following is what I understand (I also bought my first I bond in late October, between the time when the new rate was announced and it went into effect):

You will see no interest the first three months (the penalty being reflected in your total).
After 3 months, you'll see the interest added monthly.
After 6 months, you'll see the compounding.
After 5 years, you'll no longer see the penalty being reflected in your total.

If you cash in your bond before year 5 because of a low rate, it seems like best time would be 3 months into the new low rate.

I don't follow the math on how you could lose 7 months?  The rate change interval coincides with the compounding interval.  So, lets say you get 7% interest for 2 years (which is 4 6-month interest intervals, as well as 4 6-month compounds).  Then the rate drops to 1% - just wait 3 months so your penalty is 3 months of 1% interest and cash the bond.

[jnw]

I didn't know they applied the interest monthly, I thought maybe they did it every 6 months.

Thanks for clarifying that you see a monthly interest increase.

[MustacheAndaHalf]

NotJen - very helpful, I wondered about that.

I think it's slightly more complicated than the description on Treasury Direct.  Assume you bought on Jan 1 2021.

On July 1 2021, the last 3 months (Apr - June) are not posted.  You only receive interest from Jan - Mar 2021.

When Jan 1 2022 arrives... what happened to the Apr - June interest?  They can't keep holding it - so I think they pay it out on Jan 1 2022.  So I think it looks like:

Oct - Dec : no interest from last 3 months, held by Treasury Direct
Jul - Sep : updated interest rates + compounding from June 1
Apr - Jun : this interest was held back for June 1, but now is paid

So I think it's 9 months of interest excluding the last 3 months.  And after posting that interest, future interest payments will build on it - will compound.

[NotJen]

My bond has two values reported in TreasuryDirect, Amount and Current Value.  I haven't reached my first compounding point yet, so the amount reflects the original purchase price of the bond, and the current value shows the interest added for the first two months.

I'll be able to tell you what happens on Apr 1 with the compounding.  I'm guessing the "amount" will not show the penalty, but the "current value" will.  (I'm approximating the interest shown below.)  But I guess there is a chance that the amount will also show the penalty.

Date	Amount	Current Value
Month 1, day 1	10,000	10,000	Purchase date
Month 2, day 1	10,000	10,000
Month 3, day 1	10,000	10,000
Month 4, day 1	10,000	10,000
Month 5, day 1	10,000	10,030	Month 1 interest (3.54%) added
Month 6, day 1	10,000	10,060	Month 2 interest (3.54%) added <- this is where I am right now
Month 7, day 1	10,180	10,090	Month 3 interest (3.54%) added
Month 8, day 1	10,180	10,120	Month 4 interest (3.54%) added
Month 9, day 1	10,180	10,150	Month 5 interest (3.54%) added
Month 10, day 1	10,180	10,180	Month 6 interest (3.54%) added
Month 11, day 1	10,180	10,241	Month 7 interest (7.12%) added (now based on compounded amount)
Month 12, day 1	10,180	10,302	Month 8 interest (7.12%) added (now based on compounded amount)
Month 13, day 1	10,546	10,363	Month 9 interest (7.12%) added (now based on compounded amount)
...

Then at Year 5 the penalty amount drops and the Amount and Current Value match at each following 6-mo interval.

[McStache]

Is it true that the new rates for May 1st are announced around April 15th? 

And is it true if I bought say around April 20th, that I'd know the average interest gains I'd get for a full 12 months?

Yes and no.  The inflation portion of the rate will be known around April 15th.  The fixed portion (currently 0%) will only be known on May 1, but it is likely staying at 0% so not worth waiting to find out about in my opinion. https://tipswatch.com/tracking-inflation-and-i-bonds/ keeps track of the inflation numbers and also provides some guidance around what is likely to happen with the fixed part of the rate.