The short answer
An I bond’s composite rate is an annual rate applied for six months, not a guaranteed full-year return.[1] Ordinary redemption starts after 12 months; cashing before five years forfeits the last three months of interest.[2][3] TreasuryDirect values for bonds under five years already exclude that interest, so do not deduct it again.[1]
Start with a redemption value, not a market sale price
Series I savings bonds are non-marketable: they cannot be bought or sold in the secondary securities market.[4] Your exit is redemption under the savings-bond rules, not finding a buyer at a quoted market price.[2][4] Interest accumulates and is paid when the bond is redeemed rather than arriving as a regular spendable coupon payment.[3][4] This distinction matters when the purpose of the holding is a future cash payment.
Treasury’s comparison distinguishes I bonds from TIPS, whose principal adjusts with inflation and whose securities can be sold in the secondary market.[4] Do not import a TIPS sale-price calculation into an I bond worksheet. Instead, start with the purchase amount, issue month, the bond’s applicable rate periods and the proposed redemption month. These are the working inputs for the checks below, not a recommendation to buy either product.
The composite formula combines two differently timed percentages
The fixed component is an annual rate set for the bond when purchased and retained for its life; the inflation component changes every six months.[1] Treasury bases the inflation component on changes in non-seasonally adjusted CPI-U for all items, including food and energy.[1] With F as the annual fixed rate and I as the semiannual inflation rate, the composite annual rate is F + 2I + F×I.[1] Enter the percentages as decimals before multiplying.
Hypothetically, let F = 1.00% and I = 1.50%: 0.0100 + 2×0.0150 + 0.0100×0.0150 = 0.04015, or 4.015%, which rounds to 4.02% using the formula’s displayed rounding convention.[1] The assumed inputs are not an offer. Simply adding 1.00% and 1.50% would mix annual and half-year measures; even doubling the latter but omitting the cross-product gives a different answer. A six-month applicable rate stated annually does not mean earning 4.02% in six months.[1]
May and November announcements are not everyone’s reset dates
Treasury announces rates in May and November, but an individual bond resets every six months from its issue date.[1] Its official table shows September-issued bonds changing rates on March 1 and September 1, while January-issued bonds change on July 1 and January 1.[1] Consequently, a newly announced rate need not start immediately on a bond you already hold.[1]
For a hypothetical September issue, map the first earning period as September through February and the next as March through August, using Treasury’s issue-month schedule.[1] Record which announced inflation component applies to each period and retain that bond’s original fixed component.[1] A current new-issue headline is not a substitute for this bond-specific record, because different purchase cohorts can retain different fixed rates.[1] The useful comparison is between dated earning periods, not two undated percentages copied from search results.
Monthly earning, six-month compounding and a zero floor
I bonds earn interest monthly and compound semiannually; every six months the prior period’s interest is added to principal for the next calculation.[3] Interest starts on the first day of the purchase month.[1] Deflation can pull the composite rate below a positive fixed component, but Treasury does not let the composite rate fall below zero.[1] Therefore, “fixed” describes one component, not an unconditional minimum for the total rate.[1]
For a separate simplified full-period illustration, assume $10,000 and composite annual rates of 4.00% for the first six months and 2.00% for the next. Ignoring Treasury’s denomination-level rounding, the arithmetic is $10,000×1.02 = $10,200, then $10,200×1.01 = $10,302. That is $302, or 3.02%, before any early-redemption adjustment or tax, not a quoted redemption amount. The larger second-period base illustrates semiannual compounding; official account values, not this approximation, control an actual redemption.[1][3]
The twelve-month gate and five-year penalty are separate tests
Under the ordinary rules, an I bond can be redeemed after 12 months; before five years, the final three months of interest are forfeited.[2][3] Treasury illustrates this with an 18-month holding that receives the first 15 months of interest.[3] This is not a charge of 3% of principal and is not a deduction of the first three months of earnings.[2][3]
Do not assume that accepting the interest penalty makes an ordinary redemption available during the first year.[2] Once eligible, identify the actual final three earning months rather than multiplying the original purchase amount by today’s headline rate and one quarter: the bond’s rate changes on its own schedule and interest compounds.[1][3] At five years the early-redemption interest penalty no longer applies.[4] This article excludes special disaster or legal circumstances, which Treasury routes to separate guidance.[2]
An auditable penalty example—and the double-subtraction trap
Consider an independent bookkeeping example, not a simulated Treasury quote. Assume an eligible bond younger than five years has a hypothetical unadjusted value of $10,600, and its final three monthly interest entries are $30, $30 and $30. Applying the final-three-month rule gives a $90 adjustment and $10,600 − $90 = $10,510 before tax.[2] Those entries are stipulated inputs, not amounts derived from the earlier rate examples.
Treasury explicitly says that values displayed in TreasuryDirect and the Savings Bond Calculator for bonds less than five years old already exclude the last three months of interest.[1] If $10,510 is that penalty-adjusted displayed value in this hypothetical example, subtracting $90 again would incorrectly produce $10,420. Label spreadsheet columns “unadjusted model value” and “official penalty-adjusted value” so that one does not silently replace the other. An account value and a homemade accrued-interest total can differ without indicating a missing payment.[1]
What to check before submitting a redemption
Use this practical checklist: confirm Series I, issue month, ownership, age, proposed redemption month and whether the displayed value already reflects the penalty. For electronic bonds, Treasury directs you to Current Holdings for value and to ManageDirect, then Manage My Securities, then Redeem securities for redemption.[2] Check the specific holding rather than applying a single new-issue rate to every bond in the account.[1]
Electronic redemptions can be $25 or more to the penny; a partial redemption must leave at least $25, and pays interest only on the portion redeemed.[2] Paper savings bonds cannot be partially cashed, and banks vary in whether and how much they will cash.[2] Keep the confirmation and separately check when the destination account makes the proceeds usable; this article does not promise a transfer time. Do not interpret an estimated value as confirmation that a transaction has completed.
Net of the penalty is not necessarily net of income tax
I bond interest is subject to federal income tax but not state or local income tax, and Treasury describes annual reporting or deferring reporting until the money is received.[3] Thus “net redemption” here subtracts the early-redemption interest adjustment, not a personalized tax liability. An after-tax comparison needs your reporting history and applicable tax treatment; the hypothetical dollar examples do not supply either.
The electronic-bond 1099-INT becomes available in TreasuryDirect in January of the year after redemption.[2] Retain the redemption confirmation alongside your interest-reporting records. The final decision sheet should show three different things: the annual rate for a specified earning period, the official value for a specified redemption date, and any separately estimated tax. Keeping those labels distinct avoids treating an attractive rate as a promise of a particular amount of spendable cash.
Sources & scope
Links support definitions and methodology. Worked examples are hypothetical, not quotes; the review date is not the observation date of a market value.
- TreasuryDirect — I bonds interest rates ↗
Source date: Not stated in the retrieved body · Verified: 2026-09-21
- TreasuryDirect — Cash EE or I savings bonds ↗
Source date: Not stated in the retrieved body · Verified: 2026-09-21
- TreasuryDirect — I bonds ↗
Source date: Not stated in the retrieved body · Verified: 2026-09-21
- TreasuryDirect — Comparison of TIPS and Series I Savings Bonds ↗
Source date: Not stated in the retrieved body · Verified: 2026-09-21