Are Premium Bonds Really Premium?

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The price of premium bonds is higher than regular bonds and a lot of people are more careful when purchasing them. There are many misconceptions about premium prize bonds on whether they are actually profitable or not. Apart from this, how much premium bonds actually cost to government is also a question for most investors. If you also have any unanswered queries, you are on the right page and you will find all the answers over here!
Premium Bonds for Investors
Investing in a premium bond is a win-win for both parties. For government, the return rate is much lower compared to regular bonds. It is also a great investment for buyers as they can end up winning a huge amount which they couldn’t earn any other way.
Although out of 999,999 bonds being offered in series, only 1, 3 and 660 prizes are offered for first, second and third winnings respectively. The probability for securing first, second and third prize is 0.000001, 0.000003 and 0.00066 respectively. But there’s no harm in trying your luck, who knows? Apart from this, even if you don’t win anything, you will still get 3% interest rate on your premium bond, which is a reasonable return on investment.
Premium Bonds for Government
Premium bonds are actually more beneficial for the government as compared to regular bonds. It must be hard to digest considering the hefty prizes which are offered by government. Have a look on the calculation below:
Premium Bond Info
Premium Bond Denomination: 40,000
No. of bonds in the series: 999,999
No. of series: 1

Calculating Total Financing for Government
Denomination x No of bonds in the series
=40,000 x 999,999
=39,999,960,000

Complete Financing in Billion
No. of series x Total financing for government
=1 x 39,999,960,000
= 40 Billion

Calculation of Prizes
Prize Amount No. of Prize Times in a year
80,000,000 1 4
30,000,000 3 4
500,000 660 4

Total Expense on Financing (Prize Expense)
[Prize Amount x No. of Prize] + [Prize Amount x No. of Prize] + [Prize Amount X No. of Prize]/ Times in a year
= [80,000,000 x 1] + [30,000,000 x 3] + [500,000 x 660]/ 4
= 2,000,000,000

Calculating Government’s Total % Expense on Premium Bonds
Expense of Financing/Total Financing
=2,000,000,000/ 39,999,960,000

=5.00%

Adding Interest Rate
Total return rate + Interest rate
=5.00% + 3.00%
=8.00%
The total return rate on premium bonds for government is 8.00%, which is still less than that of regular bonds at 10%. The above calculation clearly shows how beneficial premium bonds are for the government.
All in all, premium bonds are beneficial and profitable for both the parties involved including investors and the government.