Premium Bond

An ERNIE money box.

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 (1.35% in May 2015). Interest is paid into a fund from which a monthly lottery distributes tax-free prizes, or premiums, to bond-holders whose numbers are selected randomly. The machine that generates numbers is ERNIE, for Electronic Random Number Indicator Equipment.[1] Prizes range from £25 to £1,000,000. Between 2005 and 2009, there were two £1m prizes each month and the minimum prize was £50, but prizes were reduced after the 2009 drop in interest rates. A second £1m prize was re-introduced in August 2014.

Investors can buy bonds at any time; they have to be held for a calendar month before they qualify. Numbers are entered 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[2] is updated by the third or fourth working day of the month.

From 1 January 2009 the odds of winning a prize for each £1 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.[3] 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 June 2015, each person may own bonds up to £50,000.[4] Bonds can be bought in units of £10 after the first £100, with a value of £1 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.

History

Premium Bonds were introduced by Harold Macmillan in his budget of 17 April 1956,[5] to control inflation[6] and encourage people to save after the war.[7] On 1 November 1956, in front of the Royal Exchange in the City of London, the Lord Mayor of London, Alderman Sir Cuthbert Ackroyd, bought the first bond from the Postmaster-General, Dr Charles Hill, for £1. Councillor William Crook, the mayor of Lytham St Anne's, bought the second. Premium Bonds were based in St Annes-on-Sea until they moved to Blackpool in the late 1990s.[8]

Premium Bond odds

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 £30,000 invested and "average luck" would win only 10 prizes a year compared to 15 the previous year.[9][10] Investors with smaller although significant amounts would possibly win nothing.

Based on odds as of June 2015 of 1/26000,[11] the expected number of prizes for the maximum £50,000 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[12] on MoneySavingExpert.com, which updates odds each month, the odds of a prize as of February 2014 are:

Prize fund distribution

Similar prize schemes operate in other countries, for instance this Premium Prize Bond certificate from India.

The prize fund is equal to one month's interest on all bonds eligible for the draw. The annual interest is set by NS&I and was 1.35% as of August 2014. The following table lists the distribution of prizes on offer in the August 2015 draw.[13]

Prize band Prize value Estimated number of prizes each month
Higher value £1,000,000 2
7% of the prize fund £100,000 5
£50,000 9
£25,000 19
£10,000 47
£5,000 94
Medium value £1,000 1246
5% of the prize fund £500 3,738
Low value £100 17,076
88% of the prize fund £50 17,076
£25 2,092,133
Total value (September 2015 - estimated) £62.3m 2,131,445

ERNIE

ERNIE 1.

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 designers were Tommy Flowers[14] and Harry Fensom and it is based on Colossus, the world's first digital computer.[15][16] It was introduced in 1957,[1] and generated bond numbers based on the signal noise created by neon tubes. ERNIE 1 has been on display in the Science Museum since 2008.[16] ERNIE is an acronym for "Electronic Random Number Indicator Equipment"

ERNIE 2 replaced the first ERNIE in 1972.[1]

ERNIE 3 in 1988 was the size of a personal computer;[1] 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 prizes each month from September 2004.[1] Developed by LogicaCMG, it is 500 times faster than the original and generates a million numbers an hour; these are checked against a list of valid bonds. By comparison, the original ERNIE generated 2,000 numbers an hour and was the size of a van.[1]

ERNIE 4 uses thermal noise in transistors as its source of entropy for generating true random numbers; the original ERNIE used a gas neon diode. Pseudorandom numbers, often called simply random, can be recreated by anybody who knows the algorithm used to generate them as they are produced in a deterministic way; true random numbers can not. The randomness of ERNIE's numbers derives from random statistical fluctuations in the physical processes involved. ERNIE's output is independently tested each month by an actuary appointed by the government, and the draw is only valid if it is statistically random.

ERNIE, anthropomorphised in early advertising, receives Valentine cards, Christmas cards and letters from the public.[1] It is the subject of the song "E.R.N.I.E." by Madness, from the 1980 album Absolutely.

Premium Bonds in other countries

Premium Bonds under various names exist or have existed in various countries. Common variations compared to UK Premium Bonds include:

Notes on specific countries:

Scientific evidence

Two financial economists, Lobe and Hoelzl, have analysed the main driving factors for the immense success of Premium Bonds. One in three Britons invest in Premium Bonds. The thrill of investment is significantly boosted by enhancing the skewness of the prize distribution. Using data collected over the past fifty years they find that the bond bears relatively low risk by conventional risk measures.[23]

Aaron Brown discusses premium bonds in comparison with equity-linked, commodity-linked and other "added risk" bonds.[24] His conclusion is that it makes little difference, either to an investor or from a theoretical finance perspective, whether the added risk comes from a random number generator or a financial security price.

Winning

Bond holders are able to check whether they have won any prizes via the National Savings & Investment Premium Bond Prize Checker website, which provides lists of winning bond numbers for the past 6 months.[25] Older winning numbers (more than 18 months old) can also be checked in the London Gazette Premium Bonds Unclaimed Prizes Supplement.[26]

References

  1. 1 2 3 4 5 6 7 "Meet ERNIE". National Savings and Investments. Retrieved 27 Jul 2015.
  2. "Premium Bonds prize checker". National Savings and Investments. Retrieved 28 March 2011.
  3. "Higher payouts from Premium Bonds". BBC News. 16 September 2009. Retrieved 14 January 2010.
  4. "Premium Bonds investment limit rises".
  5. Horne, Alistair (1989). Macmillan 1894–1956, volume I. London: Macmillan. p. 383. ISBN 0-333-27691-4.
  6. "Fifty years of Premium Bonds". This Is Money. Associated Northcliffe Digital Ltd. Retrieved 19 January 2008.
  7. "The History of Premium Bonds". This Is Money. Associated Northcliffe Digital Ltd. Retrieved 7 April 2009.
  8. "The history of Premium Bonds". NS&I. Archived from the original on 2 January 2010. Retrieved 7 April 2009.
  9. Butterworth, Myra; Wallop, Harry (5 December 2008). "Savings". London: Telegraph. Retrieved 14 January 2010.
  10. Jones, Rupert (6 December 2008). "Now bond prizes are at a premium | Money". London: The Guardian. Retrieved 14 January 2010.
  11. "NS&I Premium Bonds". Retrieved 10 February 2014.
  12. "Premium Bond Calculator". Retrieved 30 July 2007.
  13. "NS&I Premium Bond prize draw details". Nsandi.com. Retrieved 31 August 2015.
  14. "BBC Inside Out – Premium Bonds". bbc.co.uk. Retrieved 14 January 2010.
  15. Colossus: the secrets of Bletchley ... – Google Books. Books.google.co.uk. Retrieved 14 January 2010.
  16. 1 2 Schofield, Jack (13 June 2008). "First ERNIE computer picked for Science Museum". the Guardian. Retrieved 2015-07-27.
  17. For sources, refer to the main Prize Bond article
  18. "Swedish premium bonds, English summary". Swedish Government. Retrieved 12 September 2013.
  19. "List of outstanding Swedish Premium bond series". Swedish Government. Retrieved 12 September 2013.
  20. "Redeeming of Premium Bonds (in Danish)". Danish Government. 19 November 2012. Retrieved 12 September 2013.
  21. "Proclamation on renewal of two State Premium Bond Loans". Danish Minister of Finance. 18 December 1987. Retrieved 12 September 2013.
  22. "Law authorizing the issue of domestic state loans". Queen of Denmark and Danish Parliament. 28 March 1984. Retrieved 12 September 2013.
  23. "SSRN-Why are British Premium Bonds so Successful? The Effect of Saving With a Thrill by Sebastian Lobe, Alexander Hölzl". Papers.ssrn.com. 19 March 2008. SSRN 992794.
  24. Aaron Brown, The Poker Face of Wall Street, John Wiley & Sons, 2006.
  25. "Premium Bond Prize Checker". Retrieved 10 April 2012.
  26. "London Gazette Unclaimed Prizes supplement". Retrieved 10 April 2012.

External links

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