Premium Bonds, Premium Bond
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Premium bonds are government bonds that are priced higher than their face value. These bonds are sold at a premium because the interest rate paid on them is higher than the prevailing interest rates.
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Premium Bonds in the UK
In the UK, the term premium bond denotes a lottery bond that is issued by the British government’s National Savings and Investments (NS&I) scheme. Apart from NS&I’s website, investors can buy these bonds over the phone, from post offices and through regular monthly payments via a standing order. These premium bonds resemble savings accounts, allowing investors to withdraw their investment whenever they need it. Anyone older than 16 can purchase these bonds with a minimum investment of £100.
In technical parlance, premium bonds are debt securities that generate income in the form of interest. However, the interest is not paid to individual investors, but is deposited in a prize fund. This fund is used to distribute tax-free prize money, ranging from £25 to £1 million, to bondholders whose numbers are selected in a monthly lottery draw.
When an investor buys bonds, s/he is assigned a series of numbers for every £1 invested. Thus, if an investor has purchased bonds worth £200, s/he would receive 200 randomly generated bond numbers, increasing his/her chances of winning. The numbers are generated by the Electronic Random Number Indicator Equipment (ERNIE).
Such premium bonds cannot be held in joint names and are non-transferable.
Advantages of Premium Bonds
- Offer chances of winning attractive tax free cash prizes of up to £1 million.
- Allow partial or complete cash withdrawals from initial investment.
- Do not require regular investments.
Disadvantages of Premium Bonds
The disadvantages of premium bonds are:
- The investment value declines due to a rise in the inflation level.
- Chances of winning can be as low as 39 billion to 1.
- Do not provide regular interest income.
- Takes almost eight days to withdraw the investment.
Despite the uncertainty of winning the prize money, premium bonds are considered to be one of the safest investment options.