Imagine you are going to use U.S. Savings I-Bonds to save for a down payment on

Question

Imagine you are going to use U.S. Savings I-Bonds to save for a down payment on a car you want to purchase in five years, and you are going to buy $600 in bonds immediately, $600 in bonds in one year, and $700 in bonds in two years. Also assume the current interest rate will stay the same at 1.96% per year. How much money will you have toward the purchase of a car in five years? Ignore the 3-month interest penalty for cashing the bonds before five years. Explain why less interest is earned on larger bond purchases.

Explanation / Answer

AS S I-Bonds pay interest semiannually, Future Value of Bonds=600*1.0098^10+600*1.0098^8+700*1.0098^6=2052.329

The money available in 5 years would be 2052.329

Because larger bond purchase is kept for small duration than small purchases hence the effect of compounding is less compared to small bund purchases

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