11 Dec My I Bond earned interest. How is it calculated?

Q. I purchased a $10,000 I Bond on October 14, 2022 when the interest was 9.62%. The first interest payment of $236 was issued in April 2023. I thought the amount should be $481 for a full 6 months of interest. Can you please help explain?
— Investor

A. Investors paid a lot of attention to I Bonds once inflation started to rise.

The bonds have interest rates with two components: a fixed rate, which is generally minimal, and a variable rate that fluctuates with inflation.

While I Bonds begin accruing interest immediately — from the first day of the month in which bond was purchased — investors will only receive the first three months of accrued interest at the end of the first six months of ownership when their account is first credited, said Robert Corcoran, a certified investment management analyst with OneDigital in Red Bank.

“That is because the Treasury will always withhold the last three months of due interest which the bond owner forfeits as an `early withdrawal penalty’ if the bond is cashed within the first five years after its issue date, he said. “Once an I Bond is five years old, there is no interest penalty for redemption and the investor will receive the full amount of accrued interest upon redemption.”

He notes that I Bonds become eligible for redemption one year after issuance.

Let’s look at the math for your bond.

Corcoran said understanding why you received $236 rather than $240.50 — precisely half of the expected $481 full six months of interest — is a bit nuanced and a function of the Treasury’s unique bond interest calculation formula.

The formula is applied to $25 increments rounded to the nearest $0.01, and then scaled to the notional amount of the bond using units ($10,000 / $25 = 400 in this case). “While not wrong, it is slightly imprecise and perhaps overly complicated,” he said.

“Nonetheless, now that your head may be spinning, applying the formula in a spreadsheet illustrates where the $236 comes from and also shows the remaining $244 — the last three months of accrued interest — is withheld as the potential “early withdrawal penalty.”

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This story was originally published on Dec. 11, 2023.

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