Math and the Consumer’s Money
How do you determine the interest rate on savings bonds?
U.S. savings bonds have been around for decades. During World War II, they were used to not only invest in the country, but to help pay for the war effort. Since then, buying bonds is still thought of as a patriotic way of “lending” money to the government to finance the country’s borrowing needs (for more information about bonds, visit the official savings bond site at Treasury Direct, www.treasurydirect.gov).
There are several features to know when buying bonds and all of them have to do with a certain degree of mathematics. Bonds are backed by the government, and if you buy one for $500, your cashed-in value will never fall below the $500 you initially paid. That’s why they are considered safe, conservative investments. They have competitive interest rates, even between the different types of saving bonds. Although there are several rules concerning cashing certain bonds (including not cashing one in for over a year in some cases), no state or local taxes are charged, and the federal tax is deferred until the bond is cashed in. Depending on the bond, it can be for face value or half the face value. For example, people who bought Series I bonds bought them for $100 with a face value of $100; and people who bought Series EE bonds bought them for $50 with a face value of $100.
The interest rates also represent mathematics. Some bonds have a fixed rate— especially older bonds—never changing in interest over the life of the bond. But there are several types of bonds that are affected by changes in the economy, including some that have fixed rates. And although it seems as if “fixed” means never moving, in this case, it is not. The government can still change the rates in certain situations, such as in “deflationary situations.” Thus, every May and November, based on the changes in the Consumer Price Index for all Urban Consumer (CPI-U) and combined with the fixed rate, the earning rate of this type of bond is determined. This means that if you have one of these types of bonds, and it started with a rate of 4 percent, under certain economic conditions it can change to, for example, 2 percent (at this writing, I-bonds were in this category).