Everything about Premium Bond totally explained
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.
Premium Bonds were introduced by the UK government in 1956, with the aim of encouraging saving and controlling inflation, with the first bonds going on sale on
1 November of that year.
The government pays interest on the bond but, instead of the interest being paid into individual accounts, it's 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.
From 1st May 2008 the odds of winning a prize for each bond number held is 22,000 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 didn't 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 led by
Sidney Broadhurst. The designer was
Tommy Flowers. It was unveiled in
1957,
| 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 |
Scientific Evidence
Two financial economists - Lobe and Hoelzl - have analyzed the main driving factors for the immense success of the British Premium Bond.
Every third Briton invests in Premium Bonds. The thrill to invest is significantly boosted by enhancing the
skewness of the prize distribution.
Using data collected over last fifty years they find that the bond bears relatively low risk by conventional risk measures.
Premium Bond Odds
According to the
Sunday Times, Premium Bond Probability Calculator on
MoneySavingExpert.com shows the odds of winning premium bonds to be as follows
Hold £100 over a year and the chance of winning anything is one-in-20.
Hold £1,000 over a year and 57% of people win nothing.
Hold £10,000 over a year and you've a 19% 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, for example, 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'd be favoured in the draw.
Further Information
Get more info on 'Premium Bond'.
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