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Investment Dictionary:

Premium Bond

A bond that is priced higher than its par value.

Investopedia Says:
If a bond's price is higher than its par value it is selling at a premium; this occurs because the interest rate on the bond is higher than the prevailing rates in the market, making the premium bond worth more than a bond paying a lower rate. For example, if a bond with a 5% coupon were selling at par ($1000 let's say), it would be worth less than the bond paying 7%. Therefore the bond paying 7% would have to be priced higher than par, thus equalizing the attractiveness of the two bonds.

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Bond with a selling price above face or redemption value. A bond with a face value of $1,000, for instance, would be called a premium bond if it sold for $1,050. This price does not include any Accrued Interest due when the bond is bought. When a premium bond is called before scheduled maturity, bondholders are usually paid more than face value, though the amount may be less than the bond is selling for at the time of the Call.

 
WordNet: Premium Bond
Note: click on a word meaning below to see its connections and related words.

The noun has one meaning:

Meaning #1: (United Kingdom) a government bond that bears no interest or capital gains but enters the holder into lotteries


 
Wikipedia: Premium Bond
Premium_Bonds_brochure.jpg

A Premium Bond is a bond issued by the United Kingdom government's National Savings and Investments scheme. The government promises to buy back the bond, on request, for its original price.

The government pays interest on the bond but, instead of the interest being paid into individual accounts, it is paid into a prize fund from which a monthly lottery distributes tax-free prizes, or premiums, to selected bond-holders whose numbers come up. The machine that generates random numbers for the lottery is called ERNIE, which stands for Electronic Random Number Indicator Equipment. There are many different prizes ranging from £50 to the top prize of £1,000,000, of which there have been two per month since the summer of 2005 (and one per month prior to that).

The prize draw is conducted so that the winners of the 2 jackpots can be notified on the first working day of the month although the actual date of the draw varies for administrative reasons. The online prize finder is updated by the 3rd or 4th working day of the month.

Currently, the odds of winning a prize for each bond number held is 24,000 to 1. Around 23 million people own Premium Bonds, over one third of the UK's population. Each person may own up to £30,000 in Premium Bonds. Bonds are currently sold in multiples of 10, with a value of £1 per bond and a minimum purchase of 100 bonds. When they were first introduced in 1957 they were incredibly popular — perhaps because the only other similar games of chance available to the general public were the football pools; the National Lottery did not exist in the UK until 1994. In Ireland, a similar investment scheme called Prize Bond also originated in early 1957.

The Premium Bonds operated from a site in Lytham St Annes from its inception for over 40 years, later moving to new buildings in Blackpool.

ERNIE

ERNIE is a hardware random number generator. The first ERNIE was built at the Post Office Research Station by a team lead by Sidney Broadhurst. The designer was Tommy Flowers[1]. It was unveiled in 1957, generating its bond numbers based on the signal noise created by a bank of neon tubes.

ERNIE 2 replaced the first ERNIE in 1972.

ERNIE 3 was introduced in 1988 and was the size of a personal computer; at the end of its life it took five and a half hours to complete its monthly draw.

In August 2004 ERNIE 4 was brought into service in anticipation of an increase in the number of prizes to be allocated each month from September 2004. ERNIE 4 was developed by LogicaCMG, is 500 times as fast as the original ERNIE and generates a million premium bond numbers an hour; these are then checked against a list of valid bonds to determine the winning bonds before any prizes are awarded. By comparison, the original ERNIE could generate only 2000 numbers an hour and was the size of a van.

ERNIE 4 uses thermal noise in transistors as its source of entropy for generating random bond numbers; the original ERNIE used a gas neon diode. In each case the randomness of electrons and natural unpredictable variance of the physical processes involved mean that systematic trends and similar cumulative effects that affect any pseudorandom number generator are reduced greatly, if not eliminated. ERNIE's output is independently tested each month by an independent actuary appointed by the government and the draw is only valid if the output passes tests that indicate it is statistically random.

ERNIE apparently regularly receives cards and letters from the general public.

Prize Fund Distribution

The size of the prize fund on offer is equal to one month's interest on all bonds eligible for the draw. The annual rate of interest is set by NS&I and, at present (1 Aug 2007), is 4.0%. The following table lists the distribution of prizes on offer in the September 2007 draw. [2]

Prize Band Prize Value Estimated Number of Prizes
Higher Value £1,000,000 2
15% of the Prize Fund £100,000 30
£50,000 59
£25,000 118
£10,000 297
£5,000 539
Medium Value £1,000 6,735
15% of the Prize Fund £500 20,205
Low Value £100 122,573
70% of the Prize Fund £50 1,326,279
Total estimated value £112.2 million 1,476,891

Premium Bond Odds

According to the Sunday Times[1], Premium Bond Probability Calculator[2] on MoneySavingExpert.com shows the odds of winning premium bonds to be as follows

Save £100 over a year and the chance of winning anything is only one-in-20.

Save £1,000 over a year and 57% of people still win nothing.

Save £10,000 over a year and you've only an 18% chance of winning £500 or more

Other meanings

A "premium bond" is also a generic term for any bond selling for more than 100% of par value, i.e., at a price greater than 100.00, which typically occurs for high coupon bonds in a falling interest rate climate.

Cultural reference

The Premium Bond and ERNIE are mentioned in Jethro Tull's song Thick as a Brick:

In the clear white circles of morning wonder, I take my place with the lord of the hills. And the blue-eyed soldiers stand slightly discoloured (in neat little rows) sporting canvas frills. With their jock-straps pinching, they slouch to attention, while queueing for sarnies at the office canteen. Saying — how's your granny and / good old Ernie: he coughed up a tenner on a premium bond win.

Also the popular 80s band Madness wrote the song E.R.N.I.E. which is on Absolutely, their second album.

In a scene in the sitcom Hancock's Half Hour, Tony Hancock composes a letter to 'Dear Ernie' asking why his bond numbers still 'have not been included in the winning list'.

A scene in the sitcom Some Mothers Do 'Ave 'Em saw Frank Spencer refer to his mother regularly sending 'Ernie' a Christmas card, in the hope that she would be favoured in the draw.

References

  1. ^ Premium Bonds even winners lose out. Retrieved on 2007-07-22.
  2. ^ Premium Bond Calculator. Retrieved on 2007-07-30.

External links


 
 

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Copyrights:

Investment Dictionary. Copyright ©2000, Investopedia.com - Owned and Operated by Investopedia Inc. All rights reserved.  Read more
Financial & Investment Dictionary. Dictionary of Finance and Investment Terms. Copyright © 2006 by Barron's Educational Series, Inc. All rights reserved.  Read more
WordNet. WordNet 1.7.1 Copyright © 2001 by Princeton University. All rights reserved.  Read more
Wikipedia. This article is licensed under the GNU Free Documentation License. It uses material from the Wikipedia article "Premium Bond" Read more

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