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URL:  http://boards.fool.com/does-this-equation-take-into-account-the-interest-15952544.aspx

Subject:  Re: EE/E series bond Date:  10/18/2001  10:06 PM
Author:  foobar73 Number:  2243 of 35345

Does this equation take into account the interest added to the original amount invested every six months? For some reason, I thought you had to account for the biannual accrurals. Am I trying to make this too complicated? It just seems like with a YTD of 5.74% there would be more than $108.39 in interest in 30 years.

I believe the YTD includes the effect of compounding, since this is the measured yield on the bonds. If you were working from the actual interest RATE (not YIELD), then you would need to adjust for compounding as you suspected. The difference between the two is small enough that you can typically ignore it for estimation purposes. For example, a rate of 5.74% compounded semiannually gives (1+0.0574/2)^2=1.0582, or a yield of 5.82%, not much different.

To estimate the final value of the bonds, you can use the "rule of 72", which states that the number of years it takes to double your investment is roughly 72 divided by the interest rate in percent. Assuming you receive a yield of 6% for the entire 30 years, your investment doubles about every 12 years. 30/12=2.5, so your investment doubles twice, plus half a doubling. 2^2.5=5.66, so $1 grows to $5.66, and $25 grows to $141. Of course, your yield is less than 6%, so you should expect less from your investment. Also, all this is rough (the rule of 72 is not exact), but at least it gives you a ballpark figure as to what to expect from your bonds.
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