How Are Series I Bond Interest Rates Determined?

The Formula for Finding Out How Much Interest You Will Earn On Your I Bonds

How the Series I Savings Bond Interest Rates are Determined and Calculated
The interest rate paid on the Series I savings bonds is determined by the composite rate, which is the combined values of a regular, fixed rate and an inflation rate that changes with the consumer price index. Getty Images

The Series I savings bond interest rate is made up of two components - a fixed interest rate and an inflation modifier interest rate. The combined value of these two interest rates determine the interest rate that will be paid on your Series I savings bonds. This means that, unlike other bond types, the I bond interest rate is variable; that is, it changes over time and you won't be able to project the value of your bonds, say, ten or twenty years from now.

That is made up for by the fact the bonds have built-in inflation protection from the United States Treasury Department.

Let's look at the two components of the Series I bond interest rates in-depth.

The Series I Bond Fixed Rate Component

The first part of the I bond interest rate calculation is the fixed rate component. It is announced every May and November for the following six month period and is determined by the Secretary of the Treasury, or by someone whom the Secretary has designated. The fixed rate is set for the life of the bond. This is important.

Remember, though, that the fixed rate of return on your I bonds is not a guaranteed minimum interest rate. You have to factor in the inflation rate, which we will get to in a moment. If the United States experienced deflation, it's possible your I bonds could have a return of 0.00%.

Over the past decade or so, the fixed rate component of Series I savings bonds has varied from a high of 3.60% in May, 2000 to a low of 0.10% in November, 2009.

The I Bond Inflation Rate Component The I bond inflation rate component is announced each May and November, just like the fixed rate component, and is good for the following six month period. The inflation rate component is determined by changes in the Consumer Price Index, or CPI, which has long been used to gauge inflation in the United States.

If the United States is in deflation, this interest rate can be negative. Otherwise, it rises to keep pace with changes in inflation so the bond holder doesn't lose purchasing power.

Over the past decade or so, the inflation rate component of Series I savings bonds has varied from a high of 2.85% in November, 2005 to a low of -2.78% in May, 2009.

The inflation rate is combined with the fixed rate component of the Series I savings bond to calculate the composite rate.

The Composite Rate on Series I Bonds

According to the United States Treasury, the actual formula for calculating the composite interest rate on Series I savings bonds is:

Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]

The good news is you'll never have to calculate the composite rate for yourself. Instead, you can visit the United States Treasury Department website, which posts the fixed rates, inflation rates, and composite rates for the current period, as well as past periods, for all savings bonds.

To provide some context for your convenience, Series I savings bonds issued between May 1st, 2015 and October 31st, 2015 earn 0.00% interest.  That is because the inflation rate is -0.80% and the fixed rate is 0.00%.

 Whenever a negative rate is produced, the Treasury uses a zero rate; something that has happened with increasing frequency in recent years due to the Federal Reserve's monetary policies.  For example, in November, 2009, the fixed rate was set at 0.10% and the inflation rate at -2.78%, resulting in a composite interest rate of zero.  There is, quite literally, almost no good reason to select these investments over FDIC insured certificates of deposit at the moment.  

Things weren't so dire back in early 2010 when the Series I savings bond rate was set as follows:

Fixed rate = 0.30%
Semiannual inflation rate = 1.53%

Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]
Composite rate = 0.0030 + (2 x 0.0153) + ( 0.0030 x 0.0153)]
Composite rate = [0.0030 + 0.0306 + 0.0000459]
Composite rate = 0.0336459]
Composite rate = 0.0336
Composite rate = 3.36%

Regardless, it's a good practice to keep an eye on the reset dates because when the rates are attractive, it's hard to beat the Series I savings bond due to its many advantages over traditional corporate bonds or even tax-free municipal bonds.

More About the Series I Savings Bond

You can read our Guide to Investing in Series I Savings Bonds. This will walk you through tons of information about savings bonds, especially the series I savings bond, including how you can add them to your portfolio, annual purchase limits, ownership requirements, tax benefits, and much more.