What is PREMIUM BOND? What does PREMIUM BOND mean? PREMIUM BOND meaning - PREMIUM BOND definition - PREMIUM BOND explanation.
Source: Wikipedia.org article, adapted under https://creativecommons.org/licenses/by-sa/3.0/ license.
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A Premium Bond is a lottery bond issued by the United Kingdom government's National Savings and Investments agency. The bonds are entered in a regular prize draw and the government promises to buy them back, on request, for their original price. The bonds were introduced by Harold Macmillan in 1956.
The government pays interest on the bond (1.25% per year as at July 2016). Interest is paid into a fund from which a monthly lottery distributes tax-free prizes to bondholders whose numbers are selected randomly. The machine that generates numbers is ERNIE, for Electronic Random Number Indicator Equipment. Prizes range from L25 to L1,000,000. Between 2005 and 2009, there were two L1m prizes each month and the minimum prize was L50, but prizes were reduced after the 2009 drop in interest rates. A second L1m prize was reintroduced in August 2014.
Investors can buy bonds at any time; they have to be held for a calendar month before they qualify for a prize. Numbers are entered in the draw each month, with an equal chance of winning, until the bond is cashed.
Winners of the jackpot are told on the first working day of the month, although the actual date of the draw varies. The online prize finder is updated by the third or fourth working day of the month.
From 1 January 2009 the odds of winning a prize for each L1 of bond was 36,000 to 1. In October 2009, the odds returned to 24,000 to 1 with the prize fund interest rate increase. The odds reached 26,000 to 1 by October 2013. Around 23 million people own Premium Bonds, over one third of the UK population. As of July 2016, each person may own bonds up to L50,000. Bonds can be bought in units of L1 after the first L100, with a value of L1 per bond and a minimum purchase of 100 bonds (or 50 bonds when paying by standing order). When introduced in 1957 they were popular – the only other similar games were football pools; the National Lottery did not exist until 1994. In Ireland, the Prize Bond originated in early 1957.
In December 2008, NS&I dropped the interest rate (and therefore the odds of winning) due to the drop in the Bank of England base rate during the credit crunch, leading to criticism from members of Parliament, financial experts and holders of bonds; many claimed Premium Bonds were now "worthless", and somebody with L30,000 invested and "average luck" would win only 10 prizes a year compared to 15 the previous year. Investors with smaller although significant amounts would possibly win nothing.
Based on odds as of June 2015 of 1/26000, the expected number of prizes for the maximum L50,000 worth of bonds is 23 per year. The calculation is 1/26000 x 12 (draws per year) x 50,000 (number of bonds held).
According to the Premium Bond Probability Calculator on MoneySavingExpert.com, which updates odds each month, the odds of a prize as of February 2014 are:
Hold L100 over a year and the chance of winning anything is 4.51%.
Hold L1,000 over a year and the chance of winning anything is 37%.
Hold L10,000 over a year and the chance of winning anything is 99%.