You are incorrect. Series EE bonds are sold at a discount to face value and the interest rate is applied to an ever-increasing amount. Series EE bonds have an initital maturity of 30 years; however, the government guarantees that they will at least double in value after the first 17 years. This is equal to an effective annual rate of (take the seventeenth root of 2.0 and subtract 1.0) 4.16% (rounded to two decimal places). After the 17th year, the government can change the terms for years 18-30. Series EE rates are determined by taking 90% of the average yield on marketable five-year treasury securities. So, although it is often said that EE bonds pay a "fixed" rate, this is not exactly true!

Series I bonds are more complex. They are sold at face value and there is an interest factor (fixed for the life of the bond) and an inflation factor (variable and determined twice a year). The inflation factor could in theory be negative for any given six-month period, so the interest could in fact be applied to a decreasing amount (although as I stated in my earlier post, this has never happened - yet. I bonds have only been around for roughly five years or so). However, you are guaranteed to receive your entire principal if held to maturity, even if there should be persistent deflation. Unlike EE bonds, I bonds' terms canNOT be changed over their thirty year life.

Hope this helps.

Doakes