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If on 2/1/2023, a person bought $10K (@6.89% I bond rate) I bond and its I bond rate has dropped to 3.79% as of now. The current I bond rate is 5.27%. If this I bond rate of 5.27% drops in the future, will the I bond rate of 3.79% drop or rise? Why?

In addition, since the current I bond rate is 5.27%, which is lowered than the original 6.89%, why did the I bond rate of 6.89% drop to 3.79% when the current I bond rate of 5.27% is lowered than the original 6.89%?

Thank you.

1 Answer 1

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The composite I-bond rate depends on two rates: 1) the fixed interest rate set at the time of purchase, and 2) the variable semi-annual inflation rate.

The composite rate is calculated as: [rfix + (2*rinfl) + (rfix * rinfl)], where rfix = fixed interest rate at purchase, and rinfl is the semi-annual inflation rate during the period in question.

For the bond purchased on 2/1/2023, we'd need to know whether rinfl is higher or lower. Simply knowing that the composite rate falls from 5.27% to a lower rate doesn't tell us anything, because that could have been caused by a fall in the fixed rate.

For example, if the fixed rate (currently 1.3%) falls to 0%, but the inflation rate (currently 1.97%) stays at 1.97%, the composite rate for newly purchased I-bonds would go from 5.27% for bonds purchased now to 3.94% for bonds purchased in the next period. However, since the inflation rate stayed the same, bonds already owned would keep the exact same composite rate.

For the second part of your question, the reason why the bond purchased on 2/1/2023 had its composite rate fall from 6.89% to 3.79% (it will increase to 4.35% on its semi-annual reset date) is because the inflation rate fell substantially - from 3.24% to 1.69% (increasing to 1.97% on the reset rate).

The reason why the current I-bond rate is higher at 5.27% is because the fixed rate is higher now - from 0.4% for a 2/1/2023 purchase to 1.3% for current purchases. Remember that the current composite rate only applies to new purchases.

You can find more information on how I-bond rates are calculated at Treasury Direct, and a table of all rates here.

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