The Basics of Prize Bonds

Prize bonds are a type of bond that was developed in Ireland in 1956. These bonds do not pay a regular amount of interest like traditional bonds do. A traditional bond will provide you with regular coupon payments. A prize bond enters you into a random drawing by the government. The government will choose a certain number of bonds in the group to receive a payment. This type of bond was designed to allow investors to invest in the government and help them repay government debt.

Game of Chance

This type of investment is basically a game of chance. If you invest in a prize bond, you essentially take a gamble on your returns. You could win multiple time, or, you could never have your bond chosen to receive payments. This risk and reward is what makes this bond so attractive to investors. Many investors like the chance of being able to receive multiple payments and bring in a higher yield. Even though there is the potential of a higher yield, you also have to be aware that you could receive nothing and lose your investment altogether.

Callable

Another feature of these bonds is that they are callable. This means that if you are a bond holder, you can demand the principal that you have invested back from the government at anytime. You do not have to wait until maturity or a certain due date to collect your money. This means that if you try out the prize bond for a while and do not receive any interest payments, you can get your money back and invest it into something else. There are no surrender fees, or early cash out penalties. In this way, the bond is easy to work with.

How It Works

When you purchase a prize bond, you will see a seven digit serial number on your bond. All of the bond serial numbers are entered into a computer system. The computer system then searches through all of the available serial bond numbers and chooses several of them at random. This selection process is done every week.

Compared to Regular Bonds

Even though this type of bond is similar to a regular bond, there are a few key differences. The biggest difference is in the consistency of payments. With a traditional bond, you are going to have a coupon rate and receive regular coupon payments from the bond issuer. For example, you might receive a fixed payment every six months for the life of your bond. With a prize bond, you will not have any payment consistency.

This means that if you are an investor that desires steady income, this is not the best investment that you could choose. If you like the opportunity to earn a higher yield, then a prize bond might be something to consider.

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