How Frequently Are Interest Payments Made on I Bonds- Understanding the Schedule

How often is interest paid on I bonds?

Interest on I bonds is compounded semiannually and credited to the bond on the first day of the month following the end of the six-month interest period. This means that interest is paid twice a year, every six months. The interest is calculated based on the bond’s current interest rate, which is set when the bond is issued and remains fixed for the first 12 months. After the initial 12 months, the interest rate can be adjusted twice a year, on May 1st and November 1st, based on the Consumer Price Index (CPI). The interest earned on I bonds is exempt from state and local taxes and is subject to federal income tax. However, the interest is not taxed until the bond is cashed or matures.

In the first six months after purchasing an I bond, no interest is earned. This “grace period” is designed to allow investors to redeem the bond without incurring any interest penalty. After the initial six-month period, the interest begins to accrue, and the bondholder will receive interest payments every six months for the remaining term of the bond, which is typically 30 years.

The interest rate for I bonds is composed of two parts: the fixed rate and the variable rate. The fixed rate is set for the first 12 months and remains constant throughout the bond’s term. The variable rate, on the other hand, is adjusted twice a year based on the CPI. This adjustment ensures that the real yield of the bond, after accounting for inflation, remains positive.

When calculating the interest on I bonds, it is important to note that the interest is compounded semiannually. This means that the interest earned in each six-month period is added to the bond’s principal, and interest for the next period is calculated on the new, higher principal amount. This compounding effect can significantly increase the total interest earned over the bond’s term.

In conclusion, interest on I bonds is paid twice a year, every six months. The interest is compounded semiannually and credited to the bond on the first day of the month following the end of the six-month interest period. Understanding how interest is paid on I bonds can help investors make informed decisions about their investments and plan for their financial future.