I have started to use ChatGPT regularly. It’s really powerful. I asked it to find me a dishwasher without a filter in the bottom that had good ratings for reliability and it sorted through dozens of models to find a Maytag.
I asked ChatGPT this question today:
What will a $1,000 I-series Savings bond bought in September 2001 be worth at maturity if inflation is 2%?
The answer:
To estimate the value of a $1,000 I-series Savings Bond bought in September 2001 at maturity with an average inflation rate of 2%, let’s break it down:
Key Facts about I Bonds:
- I Bonds earn interest monthly, compounded semiannually.
- The interest rate is a combination of:
- A fixed rate (set at purchase and never changes).
- A variable rate (adjusted every 6 months based on inflation).
- Maturity: I Bonds earn interest for up to 30 years.
- Tax: You only pay federal taxes on interest when you cash out.
Goal:
Estimate the value of the bond at maturity in 2031 (30 years from 2001), assuming:
- $1,000 face value
- 2% annual inflation
- Fixed rate is 3.00% (which is the actual fixed rate for I Bonds issued in September 2001)
Formula:
The I Bond’s annual composite rate is calculated as:
Composite Rate=Fixed Rate+(2×Inflation Rate)+(Fixed Rate×Inflation Rate)\text{Composite Rate} = \text{Fixed Rate} + (2 \times \text{Inflation Rate}) + (\text{Fixed Rate} \times \text{Inflation Rate})Composite Rate=Fixed Rate+(2×Inflation Rate)+(Fixed Rate×Inflation Rate)
With:
- Fixed Rate = 3.00% (0.03)
- Inflation Rate = 2.00% (0.02)
=0.03+(2×0.02)+(0.03×0.02)=0.03+0.04+0.0006=0.0706 or 7.06%= 0.03 + (2 \times 0.02) + (0.03 \times 0.02) \ = 0.03 + 0.04 + 0.0006 = 0.0706 \text{ or } 7.06%=0.03+(2×0.02)+(0.03×0.02)=0.03+0.04+0.0006=0.0706 or 7.06%
So, the bond would earn 7.06% annual interest compounded semiannually.
This seemed very high to me so I cross-checked with Treasury Direct.
I bonds earn a combined rate of interest
the interest on I bonds is a combination of
a fixed rate
a inflation rate
The fixed rate is an annual rate.
The inflation rate changes every 6 months.
We set the inflation rate every May 1 and November 1. We base the inflation rate on changes in the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy.
The actual rate of interest for an I bond is calculated from the fixed rate and the inflation rate. The combined rate changes every 6 months. It can go up or down.
The composite rate for I bonds issued from November 2024 through April 2025 is 3.11%.
Here’s how we got that rate:
| Fixed rate | 1.20% |
|---|---|
| Semiannual (1/2 year) inflation rate | 0.95% |
| Composite rate formula: [Fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)] | [0.0120 + (2 x 0.0095) + (0.0120 x .0095)] |
| Gives a composite rate of | [0.0120 + 0.0190 + 0.0001140] |
| Adding the parts gives | 0.031114 |
| Rounding gives | 0.0311 |
| Turning the decimal number to a percentage gives a composite rate of | 3.11% |
[end quote]
The ChatGPT equation is wrong because it uses a whole year inflation rate in the equation instead of a semi-annual inflation rate. This gives an interest rate that is too high. Their calculations of interest and bond value were so much higher than mine that I was startled. That’s why I double-checked it.
Beware of ChatGPT. It’s very confident but the answer may be wrong.
I don’t know how to correct it. I would still like to see the calculations…as long as they are correct.
Wendy
