Please explain how I Bonds accrue interest

[Anonymous]

Maybe I'm missing something about the question. I bonds are variable rate zero coupon. In other words, you don't get the interest payment until you cash out and the interest rate changes regularly and depends on how long you hold it. As PP point out, if you hold it for less than 5 years, you forfeit the last 3 months of interest. So if you bought in December, TreasuryDirect will only display today's value after accounting for the interest forfeiture. Once you hold an I bond for 5 years, TreasuryDirect stops deducting the 3 month interest forfeiture when displaying its value.

Also, while interest on an I bond is calculated monthly, it is only compounded semi-annually. So it won't be until June that the interest from the first 6 months is added to your principal for future monthly interest calculations. But, the interest accrual added will be for all of the first 6 months. So you get less benefit from compounding than what you would get from monthly compounding, but that is separate from the 3 month interest forfeiture.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:You bought in December. Interest accrued on:

12/31
1/31
2/28
3/31

The April interest hasn't accrued yet. The last 3 months don't show on your balance because you haven't held them long enough yet. In 2 days your April interest will be added.

OP here. I'm not clear on how long I need to hold the the bonds before I see the last three months of interest added to my balance.

You are getting the interest and it is accruing. It is just not reflected in your balance until 5 years. If you hold the bonds for say two years and by that time the interest rate goes down to say 3%, you will lose the last 3 months of the new rate (so 3 months). Assuming the current rate is the best it will be, it will be advantageous to hold at least 15 months so that the last 3 months you lose will be at the lower rate (if it indeeds go lower). In any case, you have to hold a minimum of 12 months.

Super helpful. Thank you!!