New on FinoLib · Volume V: Personal Finance
I have just published a new article on FinoLib, my free finance education library: I Bond Interest Rate Formula Explained. It is part of Volume V: Personal Finance. It is part 2 of a 2-part guide. Below is a summary of the topic in plain, expert language, so you can follow the idea even before you open the full article.
A closer look
TIPS. Treasury Inflation-Protected Securities are marketable Treasury bonds (5, 10 or 30 years) whose principal rises with the CPI and falls with deflation. The fixed coupon is paid every six months on that adjusted principal, and at maturity you receive the adjusted principal or the original amount, whichever is greater. Their yield is a real yield (7.1: Why Investing Differs from Saving): on Oct 1, 2026, the 10-year TIPS yielded 2.88% while the ordinary 10-year Treasury yielded 5.24%. The gap, 5.24% − 2.88% = 2.36%, is the market’s breakeven inflation rate — TIPS come out ahead if inflation averages more than that over the decade.
Tax is the catch. Take $10,000 of TIPS with an illustrative 2% coupon and a year of 3% inflation: principal rises to $10,000 × 1.03 = $10,300, and the coupon pays 2% × $10,300 = $206 instead of $200. Both the $206 and the $300 principal increase are federally taxable that year, even though the $300 is not paid out until maturity — so-called phantom income. Holding TIPS inside an IRA or 401(k) avoids the mismatch; like other Treasuries, they are exempt from state and local income tax.
A plain word on crypto. Cryptocurrencies such as bitcoin are digital tokens recorded on a blockchain. A token has no earnings or interest behind it; its price is whatever the next buyer will pay. Four things follow:
A worked example
Worked Example — Compare the Scenarios: $10,000 for Five Years in an I Bond, a TIPS or a Treasury Note
Three Treasury-backed ways to hold $10,000 for exactly five years, at early October 2026 rates: an I bond with a 0.90% fixed rate; a 5-year TIPS bought at a 2.65% real yield; and an ordinary 5-year Treasury note at 5.01%. All three compound every six months. Illustrative assumptions: inflation runs at a constant annual rate π, the TIPS is bought at par with coupons reinvested at the same yield, and the figures are before tax.
Under the hood
Under the Hood: Why Crypto Tax Rules Differ From Stock Rules
Every crypto tax rule follows from one classification. Since IRS Notice 2014-21, the IRS has treated virtual currency as property, not currency, so each disposal is a sale of property: trading one token for another, or paying for a $5 coffee with bitcoin bought for $2, realizes a gain ($3 in the coffee case), just as selling a stock would. A holding of more than one year qualifies for the long-term rates in 7.6. The same classification creates a gap. The wash-sale rule, 26 U.S.C.
Decision rule
Target-date fund: if one workplace account holds most of your retirement money and you do not want to manage the mix, put 100% of it in the plan’s target-date fund for your retirement year, provided its expense ratio is 0.30% or less; above that, compare the plan’s index funds. Do not add other funds alongside it. Inflation protection: if the money may be needed in one to five years, or sits in a taxable account, use I bonds up to $10,000 a person a year.
The costliest mistake
Letting a speculative position grow until it controls the plan. Take a $50,000 portfolio with 30% in crypto against one with 5%, and repeat bitcoin’s 77% fall of November 2021 to November 2022: the large position loses $50,000 × 30% × 77% = $11,550, or 23.1% of the whole portfolio; the small one loses $50,000 × 5% × 77% = $1,925, or 3.85%. The $9,625 difference, had it stayed invested at an assumed 7% for 20 years, would be $9,625 × 1.07^20 = $9,625 × 3.8697 = $37,246.
Edge Cases: When the Standard Answer Changes
The rules above describe a new purchase by one person. These situations change the answer: Situation What changes Why Number or rule You hold I bonds bought May 2020–October 2022 Consider cashing each once it is five years old and moving the money to TIPS or a newer I bond Their fixed rate is 0.00%, so they earn inflation only; deferred interest becomes taxable when you cash them 3.34% for the current six months vs 4.26% on new bonds; 5-year…
Recap
A target-date fund runs a whole glide path and its rebalancing inside one fund, so use it alone and keep it cheap: in the illustration, half a point of extra fee cost the household’s 401(k) $53,499 over 30 years.
What the full article covers
The full article includes worked examples, a look under the hood at the mechanics, a clear decision rule, the one mistake that costs people the most, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume V: Personal Finance
Read the full article on FinoLib
The complete article, I Bond Interest Rate Formula Explained, with every worked example, diagram, quiz and source, is free to read in Volume V, Personal Finance on finolib.com.
Explore the Finance Education Series: Vol. II — Capital Markets · Vol. I — Global Economy · Vol. III — Finance Encyclopedia · Vol. IV — Finance Careers · Vol. V — Personal Finance