Do I-Bonds pay compounded interest?

[zakenjanei]

A basic question for you I-bond holders - do I-bonds
pay interest for the accumulated interest? Or is the
interest paid only for the I-bond original amount?

Joe

 

[cute fuzzy bunny]

You can read the fine details on the treasury web site, but basically ibonds and tips work almost identically...the principal amount is adjusted to cpi periodically and the fixed interest rate is then paid on that varied capital rate. When you cash the bond, you get the cpi adjusted principal back.

I think the two ways tips and ibonds differ is that with tips you can have negative cpi reduce your principal value if there is deflation, and you have to pay taxes on the inflation adjustment every year. So if we have a long period of deflation, you may lose principal and get less back at the end than you paid for the bond. Ibonds assure you will get at least your original principal back, and all earnings are tax deferred until the bond matures or you cash it in.

You get ~2% for tips today vs 1% for ibonds...in other words, you get a 2x premium for paying the tax annually and taking a risk on deflation.

At least thats my recollection...owners can say for sure. I dont own either.

 

[charlie]

TH, I think that for TIPS you will receive the par value
of the bond in the worst case ...... never less than
price you paid if you bought a new issue. All bets are
off if you bought in the secondary market in terms of
recovering your purchase price, but at a minimum you
will still receive the original issue price back at maturity.

Cheers,

Charlie

 

[cute fuzzy bunny]

You're absolutely right charlie. I think thats the second time I got that wrong. Must have a bit stuck in my brain.

Oh well, check out the tag line below...

 

[Al]

My understanding is that interest is componded every six months at the same time your I-Bond switches to the new rate.

A new rate occurs twice a year. Your I-Bond takes on the prevailing rate at it's six month aniversary of when it was issued and then at each six month interval after that. At these times, the interest is compounded.