Q:

# How do Series I savings bond interest rates work?

A:

The Series I savings bond interest rate is a composite rate consisting of a fixed rate and an inflation rate, reports TreasuryDirect. The fixed rate remains the same for the life of the bond, while the inflation rate is adjusted every 6 months, according to the Consumer Price Index.

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Consumers buy Series I savings bonds at face value and earn monthly interest on them for up to 30 years, according to TreasuryDirect, a service of the U.S. Department of the Treasury. The U.S. Treasury Department announces the fixed interest rate for savings bonds every 6 months, and once bonds are purchased, that rate is locked in. The equation used to determine the composite interest rate of Series I bonds is the fixed rate plus two-times the inflation rate, added to the fixed rate, times the inflation rate. For instance, as of February 2015, the fixed rate is zero percent and the inflation rate is 0.74 percent. Zero plus 2 times 0.0074 is 0.0148, and zero multiplied by 0.74 is zero. This makes the composite interest rate 1.48 percent until April 30, 2015, when the rate is adjusted again.

Series I savings bonds holders can cash them in after 1 year, as reported by TreasuryDirect. If they cash in the bonds less than 5 years after they bought them, they lose 3 months of interest payments. Cashing in Series I bonds any time after 5 years is penalty-free.

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