WalletPrep

PrintBack to the lesson

WalletPrep worksheet · Saving

How do I bonds work, and are they a good idea?

Name ____________________ Date __________

Key ideas

  1. The rate is fixed rate plus inflation. The fixed part never changes. The inflation part resets every 6 months, so your rate changes twice a year.
  2. Hold at least 12 months, ideally 5 years. You can't cash an I bond in its first year. Before 5 years, you lose the last 3 months of interest.
  3. Limit of $10,000 per person each year. Electronic I bonds on TreasuryDirect are capped at $10,000 per person per calendar year, starting at $25.

Vocabulary

I bond
A US savings bond whose rate combines a fixed rate with an inflation rate that resets every 6 months.
Inflation
The rise in prices over time, which means each dollar buys a little less each year.
Bond
A loan you make to a government or company. It pays you interest and returns your money on a set date, called the maturity date.
Emergency fund
Cash set aside only for surprises like a job loss, a car repair or a medical bill. A common goal is 3 to 6 months of essential costs.
Diversification
Spreading your money across many investments so that one bad company or sector does less damage to the whole.
Treasury bill
A short-term loan to the US government, lasting 4 to 52 weeks. You buy it below face value and get the full face value at maturity.

Work it out

Ana buys $5,000 of I bonds. Assume the rate stays at an example 4.02% for her first year. Rates really reset every 6 months.

  1. Bought
  2. Interest in 12 months
  3. Value before penalty
  4. Last 3 months of interest
  5. Ana gets back

Check yourself

  1. When is the earliest you can cash an I bond?

    • A. Any time
    • B. After 3 months
    • C. After 12 months
    • D. After 5 years

  2. An I bond has a fixed rate of 0.50% and a semiannual inflation rate of 1.00%. What is the composite rate, roughly?

    • A. 1.50%
    • B. 2.51%
    • C. 3.00%

  3. Which tax does I bond interest avoid?

    • A. State and local income tax
    • B. Federal income tax
    • C. All taxes, always
    • D. None

Your turn

Look up today's I bond rate on TreasuryDirect and write it next to your savings rate. If you already have at least 3 months of bills in savings, decide how much money you won't need for at least a year.

www.walletprep.com/learn/i-bonds/ · Free to print, copy and share for non-commercial classroom use.

Answer key

How do I bonds work, and are they a good idea?

Work it out

  1. Bought$5,000
  2. Interest in 12 months$203
  3. Value before penalty= $5,203
  4. Last 3 months of interest− $52
  5. Ana gets back= $5,151
  1. Interest compounds every 6 months at half the yearly rate: $5,000 × 1.0201 × 1.0201 = about $5,203 after 12 months.
  2. After 9 months her bond was worth about $5,151.50, so the last 3 months earned about $5,203 − $5,151.50 = $52.
  3. Cashing at 12 months gives up that $52, leaving $5,151. Had she waited until year 5, there would be no penalty.

Check yourself

  1. C. After 12 months I bonds can't be cashed for the first 12 months. Between 1 and 5 years you can cash them, but you lose the last 3 months of interest.
  2. B. 2.51% Fixed + 2 × inflation + fixed × inflation = 0.50% + 2.00% + 0.005% = 2.505%, which rounds to about 2.51%.
  3. A. State and local income tax I bond interest is subject to federal income tax but exempt from state and local income tax. It can also be excluded federally for some education costs if you qualify.