How to Calculate I-Bond Return Including the Composite Rate

The Composite Rate Is Not What You Think It Is

I-Bonds carry two separate rate components. The fixed rate stays constant for the life of the bond. The inflation rate resets every six months based on the Consumer Price Index for All Urban Consumers (CPI-U). Treasury combines them using a formula that includes a cross-product term. That term is small but not zero.

Treasury's official composite rate formula:

Composite Rate = Fixed Rate + (2 x Semiannual Inflation Rate) + (2 x Semiannual Inflation Rate x Fixed Rate)

The third term is where most projections fail. At a fixed rate of 1.30% and a semiannual inflation rate of 1.48%, that cross-product adds 0.0385 percentage points to the composite. Over a $10,000 position held five years, dropping that term costs you approximately $19 in projected accuracy per rate period.

That matters when you are deciding between an I-Bond, a Treasury Inflation-Protected Security, or a high-yield savings account. Imprecise inputs produce imprecise decisions.

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Breaking Down Each Component

The Fixed Rate

Treasury announces the fixed rate for new I-Bond issues each May and November. Once you purchase a bond, that fixed rate locks in for 30 years. As of the November 2025 announcement, the fixed rate stood at 1.20%.

Bonds purchased at different times carry different fixed rates. A bond bought in 2022 when the fixed rate was 0.00% behaves differently from one purchased in late 2023 at 1.30%, even if both face the same current inflation adjustment.

Check the issue date on your TreasuryDirect account. The fixed rate printed there is the one that applies to your calculation.

The Semiannual Inflation Rate

Treasury derives this from the percentage change in CPI-U between two reference months. For the May rate announcement, Treasury compares CPI-U from the previous September and March. For the November announcement, it uses March and September of the current year.

The Bureau of Labor Statistics publishes CPI-U data monthly. Treasury applies this formula:

Semiannual Inflation Rate = (CPI-U Ending Month / CPI-U Starting Month) - 1

If CPI-U rose from 314.175 in September 2024 to 318.847 in March 2025, the semiannual inflation rate equals (318.847 / 314.175) - 1, which equals 0.01487, or 1.487%.

That figure feeds directly into the composite rate formula. It does not get doubled to produce the composite. It gets doubled as part of the formula structure because I-Bonds credit interest semiannually.

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Worked Example 1: Current Rate Period Calculation

Scenario: You purchased a $10,000 I-Bond in October 2023. Your fixed rate is 1.30%. The current semiannual inflation rate is 1.20%.

Step 1: Apply the composite rate formula.

Composite Rate = 0.0130 + (2 x 0.0120) + (2 x 0.0120 x 0.0130)

Composite Rate = 0.0130 + 0.0240 + 0.000312

Composite Rate = 0.037312, or 3.7312%

Step 2: Calculate semiannual interest earned.

I-Bonds credit interest based on a six-month period, not annually. The six-month interest rate equals the composite rate divided by 2.

Six-month rate = 3.7312% / 2 = 1.8656%

Interest earned over six months = $10,000 x 0.018656 = $186.56

Step 3: Confirm annualized return.

If the same composite rate applied for a full year, the annualized return compounds across two semiannual periods.

Year-end value = $10,000 x (1 + 0.018656)^2 = $10,000 x 1.037660 = $10,376.60

Annual interest = $376.60

The stated composite rate of 3.7312% slightly understates the effective annual yield of 3.766% due to semiannual compounding. For a $10,000 bond, that difference equals $34.60 over one year. Over a five-year hold, compounding amplifies the gap further.

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Worked Example 2: Comparing Two Bonds Purchased at Different Times

Scenario: You hold two I-Bonds. Bond A was purchased in May 2020, carrying a fixed rate of 0.00%. Bond B was purchased in November 2023, carrying a fixed rate of 1.30%. The current semiannual inflation rate is 1.20% for both.

Bond A Composite Rate:

0.0000 + (2 x 0.0120) + (2 x 0.0120 x 0.0000) = 0.0240, or 2.40%

Bond B Composite Rate:

0.0130 + (2 x 0.0120) + (2 x 0.0120 x 0.0130) = 0.037312, or 3.7312%

Six-month interest on $10,000:

Bond A: $10,000 x (0.0240 / 2) = $120.00

Bond B: $10,000 x (0.037312 / 2) = $186.56

Difference per period: $66.56

Over five years (10 rate periods, assuming identical inflation rates): Bond B generates approximately $665.60 more in interest before compounding effects. With compounding, the gap widens further. Bond A's zero fixed rate means its return tracks inflation and nothing more. Bond B's 1.30% fixed rate delivers real return above inflation.

This is why the purchase window matters. The fixed rate is permanent. Timing your purchase to capture a higher fixed rate has compounding consequences across a 30-year bond life.

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The Early Redemption Penalty and Its Effect on Net Return

I-Bonds held fewer than five years forfeit the last three months of interest on redemption. That penalty changes the effective return calculation.

Example: You redeem a $10,000 I-Bond after exactly 12 months. The composite rate was 4.28% for both six-month periods (fixed rate 1.30%, semiannual inflation rate 1.49%).

Without penalty: $10,000 x (1 + 0.0214)^2 = $10,432.46, yielding $432.46 in interest.

With penalty: You forfeit the final three months of interest. Treasury estimates this as approximately half of one six-month period.

Approximate penalty: $10,214 x (0.0214 / 2) = $109.29

Net interest after penalty: $432.46 - $109.29 = $323.17

Effective 12-month net yield: $323.17 / $10,000 = 3.23%

That is still positive. But it is materially below the stated composite rate of 4.28%. Anyone projecting I-Bond returns without accounting for the redemption penalty on short holds overstates their actual net yield by more than a full percentage point.

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How Rate Periods Apply to Your Specific Bond

Each bond follows its own six-month rate clock starting from its issue month. A bond issued in April cycles through rate changes in April and October. A bond issued in January cycles in January and July.

Treasury does not apply the new rate on May 1 or November 1 to all bonds simultaneously. Your bond's rate change date depends solely on the month you purchased it.

This matters for redemption timing. If your rate clock just reset to a higher composite rate, holding the full six months captures the full benefit. Redeeming one month into a new rate period means you collect the new rate for one month, but lose two months of it to the three-month penalty.

Map your issue month to identify your personal rate change dates before making any redemption decision.

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What the Composite Rate Does Not Tell You

The composite rate measures nominal return, not real return adjusted for your marginal tax rate. I-Bond interest is exempt from state and local income tax. It is subject to federal income tax, either annually if you elect accrual reporting or at redemption under the default cash-method treatment.

At a 32% federal marginal rate, a composite rate of 4.28% produces an after-tax yield of approximately 2.91%. At 22%, the after-tax yield reaches 3.34%. Compare that after-tax figure against HYSA rates, Treasury bill yields, and TIPS real yields before concluding that I-Bonds represent the superior placement for your cash.

Tax treatment also affects the effective real yield relative to actual inflation. If CPI runs at 3.50% annually and your after-tax I-Bond yield equals 2.91%, you are losing purchasing power in real after-tax terms despite holding an inflation-indexed instrument.

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Run Your Own Numbers

The composite rate formula has four inputs: the fixed rate on your specific bond, the current semiannual inflation rate, your hold period, and your marginal tax rate. Changing any one of them shifts the output materially.

The CalcMoney Investment Calculator accepts all four. Input your purchase date to retrieve the applicable fixed rate, set the current inflation rate, specify your expected hold period, and model the after-tax net return against competing instruments.

Open the Investment Calculator and project your I-Bond return with precision →

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The formula is public. Treasury publishes it. Most investors still skip the cross-product term, assume the wrong rate period dates, and ignore the early redemption penalty. Those three errors, compounded across a $10,000 to $30,000 I-Bond position held over several years, produce projections that can diverge from reality by several hundred dollars. The math takes four minutes. Run it.