# Why not Prize Bonds? Expected 3% tax-free



## otto (27 Jun 2010)

I understand the expected payout rate of Prize Bonds is 3% of deposits. Of course it's tax free, so the real expected 'interest' rate is more than 4%, and access is at only a 7 day delay. 

Of course, the actual payout you receive may be more or less than 3%, but if you're 'risk neutral' and would otherwise be paying DIRT, why aren't Prize Bonds among the most competitive investments available now? Am I missing something?


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## camlin90 (27 Jun 2010)

Based on some figures I did last year:

The prize bond fund is around €1.05billion.
So there are around 168 million bonds in issue (each bond worth €6.35).

The prize structure is as follows:
€1,000,000 x 12 per year
€20,000 x 52 per year
€1,000 x 260 per year
€250 x 520 per year
€75 x whatever number is required to make the total pot of prizes 3%

The total prize fund is €1.05billion * 3% = €31.5 million per year.

Let's say you hold €6,350 in bonds - that's 1000 bonds out of the 168 million in issue.

Over a year, your chance of winning €1m is (1,000 / 168,000,000) * 12.
It's the chance that one of your  1,000 bonds is picked out, from the 168 million in issue, multiplied by the 12 chances you have to win the jackpot in each year.

In other words, you'll win the jackpot every 14,000 years per average.
The chance of winning the €1m prize is so negligible that it should be excluded from your expected return.

However, of the €31.5million paid out each year, €12m of that is made up of the jackpot. If you consider prizes that you actually have a chance of winning, only €19.5million is paid out each year. The interest rate, excluding the jackpot is €19.5million / €1.05billion or 1.86%.

Less attractive methinks.

Let's say you have €6.35 million to invest, then you can buy a million prize bonds, and your chance of winning the jackpot is much higher - you'll win it every 14 years on average. So for a long term investor with considerable funds, prize bonds may be a worthwhile investment. For everybody else, the current prize structure (weighted towards large but infrequent prizes) means returns are poor.


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## Marc (29 Jun 2010)

I agree with Camlin here. Prize Bonds fool the unwary into thinking that they have a higher expected return than they really do.

Prize Bonds
 The company was set up in 1989 to operate the scheme for the Minister  for Finance. The scheme is now operated on behalf of the National  Treasury Management Agency (NTMA) which manages the national debt on  behalf of the Minister for Finance. In 1999 the company submitted a  successful tender to operate the scheme for a further 10 years until  September 2009. 

An Post is responsible for the accounting, marketing and the conduct of  the draw. The administration is carried out by FEXCO in Killorglin,  Co.Kerry. 
Prize Bonds are a flexible, secure, state guaranteed investment. The top  prize in the monthly Jackpot prize draw is €1,000,000. A top weekly Star prize of €20,000 is  awarded each week.  With a minimum purchase of €25, that's a huge return on your  investment.


 Draws are held every Friday with over 2,500 prizes ranging between €75  and €20,000. Every eligible €6.25 Prize Bond is automatically entered in  the weekly draw no matter how old.


  The more Prize Bonds you hold the greater the possibility of you  getting a substantial return on your money. 


The Prize Bond Company Ltd. is a joint venture operated between An Post  and FEXCO. 

The number of prizes awarded each week depends on the total size of the  Prize Bond fund. It is currently calculated at a variable rate of 3% of  the fund size per annum. This provides over 2,500 prizes every week.
        Tax-free
All winnings are tax-free. In Ireland winnings are not liable to Income  Tax, Capital Gains Tax, or D.I.R.T. (Deposit Interest Retention Tax).

Prize Bond holdings at 31 December, 2008 

  Number of separate Prize Bond holdings 5.61 million
      Fund value €803.5 million 

  Source: The Prize Bond Company Limited Annual Report 2008

*Analysis*
The capital is very safe. You don’t risk the money you put in, only what  interest you’ll get, and Prize Bonds are operated by An Post which is  backed by the State.


What are the odds of winning :
The odds of any single bond winning the top prize are about 1 in 5.6  million (the number of bonds in circulation)
  However the minimum investment is €25.

For comparison the odds of any one bond winning the £1M jackpot in the UK Premium bonds is now over 40 billion  to 1.

*You’re likely to win even less than the interest rate.*
The value of prizes paid out is determined by an interest rate, which is  currently 3%. This means if you owned every Prize bond in existence,  the amount won over a year would be equal to 3% of what you put in. 
  So very roughly, on average for every €100 put into Prize Bonds, you'd  expect a €3 annual return.


  Yet because of the way the prizes are allocated, the majority of  people will win much less than the interest rate anyway. 


*Don’t think of it as ‘winning*’
 The great attraction is ‘the lottery effect,' the chance of winning a  dream, and there is of course the chance of winning a million. Equally  you could be the next space-walking astronaut, and you’re odds probably  aren’t that dissimilar! 


The fact the payouts are commonly referred to as a ‘win’ rather than an  ‘interest payment’ is psychologically devious. Comments like, “my friend  wins €75 every few months” mislead; on clinical evaluation, someone  with €10,000 of Bonds should ‘win’ €300 a year; that’s roughly €25 every  month; yet the same cash in State Savings Certificates issue 17 could ‘win’  the equivalent of €470 a year.


Worse still, compare the Prize Bond interest to the average rate of  inflation. Over the period Jan 1926 to May 2010 the average rate of inflation in the USA was 3.01%pa, German Consumer Price Index since 1948 averaged 2.61%oa, UK Retail Price Inflation since 1947 averaged 5.58%pa and the Harmonised Eurozone Inflation rate has average 1.95% since Feb 1996 which means that on average one should expect that the rate of inflation is almost certainly about the same as the the Prize Bond interest  rate, so any cash you have in bonds is only increasing at best at the same as that of the prices of everyday goods. This means by holding bonds the real amount of  money you have is not increasing. 


*Are they ever worth it?*
 Look at Prize Bonds with a clinical financial eye. Some will win more  than the average, not many, but a few. And if you're that lucky person,  this is a great return. Yet the odds of winning big get very long.


Prize Bonds aren’t as good as they first appear
  It's all about the actual prize distribution.  The following is the  prize structure:

Monthly   Jackpot Prize
  12 x €1,000,000

Weekly star prize €20,000 is awarded each week

5 prizes @ €1,000

10 prizes @ €250

Over 4000 @ €75

*Why most people win less than the interest rate*

Even though Prize Bond rates stack up poorly compared to decent savings  rates, even that’s still misleadingly generous; the real expected payout  is much less, as it's massively skewed by the distribution of the  prizes.

This is tricky to understand, so let me start with a simple example.  Suppose there a contest offered a €1,000,000 prize and allowed a million  people to buy a ticket costing €1. It could then be argued the average  winnings per ticket were €1, even though 999,999 people would win  nothing. 

A similar, though less drastic, effect is happening with the Prize Bond  interest rate; it says the payout is 3%, so you'd expect to win €3 per  €100. Yet of course this is impossible, there isn't a €3 prize; you can  either win nothing, €75, or more than €75. The big jackpot prizes, won  by a miniscule number of people, skew the payout average and make the  interest rate look much more generous than it is.

The situation that this throws isn’t a pleasant concept for Prize bond  holders expecting an average of 3%pa.

On the surface Prize Bonds don’t look to be too complex. The winners are  happily listed on the website with enough data to allow anyone with a  calculator to work out the chances of any one bond winning a single  prize over a month.

Yet to work out the chance of someone with a larger holding say five  thousand bonds winning more includes countless variables. To win €1000  in one go could be one €1000 prize, or four €250 prizes, or a  combination of smaller prizes; yet to win more than €500 holds scores of  variables. 

Plus of course, the draws are monthly, so if you’re calculating the assumed winnings over 5  years; it actually means you’re calculating the interaction of  probabilities for over 60 draws to get the various answers. 

To calculate the probability of winning is virtually impenetrable. You  would need to use a very advanced multinomial probability equation.


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## dubrov (29 Jun 2010)

Marc, I'm afriad that your analysis is deeply flawed. 
Here are a few points that I picked out from your post



Marc said:


> I Prize Bonds fool the unwary into thinking that they have a higher expected return than they really do.


 
Do you know what expectancy means. THe expectancy is still 3% regadless of the distribution of prizes



Marc said:


> Yet because of the way the prizes are allocated, the majority of people will win much less than the interest rate anyway.


 
And those that win win several times more. 




Marc said:


> The fact the payouts are commonly referred to as a ‘win’ rather than an ‘interest payment’ is psychologically devious.


 
It is effectively a gamble with your interest. You've alreadu pointed out that most people get nothing and others get a lot.




Marc said:


> someone with €10,000 of Bonds should ‘win’ €300 a year; that’s roughly €25 every month; yet the same cash in a savings account could ‘win’ over €41 every month or €500 a year.


 
Where the hell have you found a 5% return after DIRT. That would be an amazing rate of return.



Marc said:


> Worse still, compare the Prize Bond interest to the current rate of inflation, which is almost certainly higher than the Prize Bond interest rate,


 
Where are you getting your rate of inflation? Last time I looked it was around 1% and was negative only a short while ago.



Marc said:


> The situation that this throws isn’t a pleasant concept for Prize bond holders expecting an average of 3%pa.


 
I don't think prize bond holders do expect an average return of 3%. Most people are looking for a possibility to win big without losing their savings. Surely, it is a far superior way than the lottery to achieve this.

I think 3% after DIRT is a great expected return.As long as you understand it is a gamble but given it is a higher rate (after DIRT) than anyone else is offering, it is a gamble with positive expectancy


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## dubrov (29 Jun 2010)

Has anyone got a source for the expected return of 3%. I can't find anything on the website?


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## Marc (29 Jun 2010)

OK, let's think about this from both a theoretical and practical perspective.....

Example: The expected return from investing in stocks is positive and is determined by the equity risk premium and capital asset pricing model. I have a positive expected return from investing in stocks whenever I buy according to the CAPM.

However, from a practical perspective if I had invested in the MSCI World Index in say Jan 2000 my actual return has been -2.26%pa. This is not to say investing is stocks is bad idea, I just had a bad experience. Let's call it bad luck.

So, you say the expected return for an investor in Prize Bonds is 3% and the distribution of the prizes doesn't matter. Correct from a theoretical perspective. Provided that you;

(a) held every prize bond in existence for 
(b) an infinite period of time, 

then your expected return is theoretically 3%pa.

Now, let's consider this from a practical perspective 
(a) I'm not rich enough 
(b) is impossible.

You say that you "don't think prize bond holders do expect an average return of 3%" I would argue that savers putting their hard earned into Prize Bonds *must* have a positive expected return and I would suggest that the expectation is 3% since;

(a) This is what the marketing material says it is
(b) This is exactly the point the original poster was making

My point is simply this, the way in which the prize fund is distributed means that the chances of winning the occasional large prize are extremely slim and this means that the average actual return (in practical terms) is less than 3% for most savers.

I think the important point to communicate here is that on average (and on average we are all average) anyone buying Prize Bonds will probably (and this is what matters) not "win" 3%pa. Prize Bonds are therefore a bad investment. Period.


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## dubrov (29 Jun 2010)

The CAPM is irrelevant and makes no assumption about a positive expected return from stocks anyway.

You are correct that expected and actual returns rarely match and just becasue they don't match, it doesn't mean the original expected return calculation was wrong.

For Prize Bonds, expected and average return are 3% whatever way you look at it.
What you are talking about is the median return.

Say there are 11 poasible oucomes of prizes (all equally likely)

0,0,0,0,1,2,3,4,5,6,100000

The expected return here is 9092.82
The median is 2.

You are correct that the median for prize bonds is much less than 3%.

You can't have it both ways, a steady 3% return with the possibility of big prizes.


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## JoeB (29 Jun 2010)

Well, it doesn't sound too bad to me. It's correct to say that the return is 3%, but this isn't guaranteed, it's an average return.

I'd say that someone with about 3,000 'invested' would make about 3% or a little under. I'd be interested in seeing a calculation showing how much under,.. I'd guess that someone with 3,000 Euros worth might earn 2.6% and someone with 30,000 Euros worth would earn closer to 2.8%... anyone know or care how to calculate this? It's clear that someone who owned them all would earn exactly 3%, and someone with 25% of the total would likely also win 3%.

I'm basing the on the fact that only 16 prizes a week are greater than 75 Euro, and there are 2,500 prizes of 75 or less... so I'm not sure of the skewing effect of the massive prizes. I'm going to look at the figures and report back... I don't think I'll be capable of a complete answer, but maybe just some pointers.

The chance of winning a life changing amount has to be taken into account, even if it is a very small chance.


edited to add: for bonus points, can someone say what percentage of the total prize bonds fund must one person own in order that they have a 50-50 chance of obtaining a return of exactly 3%.. (they will also have a certain probablity of winning more, or less, both of these should make up the other 50 of the 50-50 chance)


I'm assuming here that the expected return increases as the number of prize bonds owned goes up, but this might be a mistake... the expected average return for everybody, or for each prize bond is 3%... is there actually a skewing effect due to the prizes or not?


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## Marc (29 Jun 2010)

Dubrov, I don't understand your point.

I thought that the CAPM said (and I paraphrase here) that the expected return from a stock  equals the investors' required rate of return which in turn equals the  cost of equity capital for a stock. I am just referencing Merton Miller here (Nobel Prize in Economics 1990).

If there was no positive expected return from investing in stocks, are you not just saying that companies can raise capital for "free" in the markets? In which case we don't need to spend anymore money bailing out the banks since wouldn't the cost of capital now be zero? Of course this is not the case. The CAPM says that stocks have a higher expected return than the risk free rate because they are risky. Unless the risk free rate is persistently zero from here until forever, surely this implies a positive return for stocks.

Anyway, for the avoidance of doubt, I referenced the CAPM because it is a model to do with the theoretical expected return for an investment - in this case in the stockmarket. Yet, as any investor in the market will tell you their experience recently has been negative despite the theoretically positive expected return from investing in stocks.

Again, the point being that investing in stocks is not a bad decision, but investors may have had a bad outcome - or bad luck.

I am a firm believer in ensuring that anyone who reads a post on askaboutmoney gets the important point  (and that posts don't become simply a game of who has read the most economics textbooks).

Which I repeat is this, just because the brochure for Prize Bonds can legitimately (and mathematically) claim a prize fund of 3% it doesn't mean that you will win 3%pa (or even close to this) on average. Which you seem to have agreed with.

Therefore investing in Prize bonds is a bad decision (since you can obtain a higher average return from a savings account) although the extremely slight possibility of winning a large prize  (good luck) is sufficient to entice savers to purchase a bad investment since they might be lucky and get a good outcome.  

The field of Behavioural Finance has studied this pay off in some detail and concluded that this explains why people buy lottery tickets or prize bonds etc when they are clearly bad investments.

Or, as a friend pointed out recently the marginal utility of a lottery ticket is enhanced by the licence to dream about what you could do if you did win and you have no right to these dreams if you don't buy a ticket.

Or, as I often say; "Prize bonds: the triumph of optimism over numeracy." and "Winning the jackpot on Prize Bonds doesn't make the decision to purchase any less imprudent."


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## JoeB (29 Jun 2010)

But the chance of winning a huge amount is real. The average expected return is also 3%, which isn't bad.

There is a skewing effect of the prize structure, but we haven't yet seen any figures to illustrate how large it is. Large holders may win more than 3% per year, making it a more attractive investment for them.

I don't think the skewing effect is very large, or significant, PROVIDED that the number of prize bonds held  exceeds a certain number, .. perhaps 3,000 Euros, but definitely for amounts of around 30,000 or more...  

And for amounts of 30,000 or so, then the chance of winning the big prizes may become significant. And winning a large amount would be life changing, which is hard to quantify.

It's better than the lotto I'd say.


edited to add.
Ok, the skewing effect is real and is quite large... this is because a huge amount of the prize fund is given out in very large prizes.. about 40% or more of the total prizes is given out in the 1,000,000 prize.. so I now think that the expected average return would be more like 1.8% or so,.. and the remaining 1.2% is what you pay for the chance of winning the 1,000,000.

Basically what Camlin90 said in the second post...

Still better than the lotto I reckon.


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## Marc (30 Jun 2010)

According to the Annual Report and accounts for the year ended 2008 the total prize fund was €20,259,775 from a total fund of just over €803M

There are slightly over 5.6M separate holdings in issue.

So, if everyone held the same number of bonds, the odds of any one household winning the Jackpot each month are about 1 in 5.6M.

To put that into some perspectice, the odds of being on a flight which results in at least one fatality whilst on a plane operated by the top 25 airlines with the best accident rates is about one in 5.4 Million.

Or, according to the UK Met Office, the odds of being struck by lightning are about 1 in 3 million.

Finally, from the Mirror Newspaper (so it is almost certainly made up) the odds of left handed people being killed while using a right handed product 1 in 4,400,000.

96.754% of statistics are made up on the spot - Spike Milligan.


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## JoeB (30 Jun 2010)

The figures don't seem to add up.

If there are 5.6m bonds, and the price is 6.35, then there'd be only 32 million Euro or thereabouts in the fund.

Would there not be about 123million prize bonds,  each at 6.25... giving about 803 million?

So the odds are worse now... about 1 in 10 million of winning the top prize once in a year, per prize bond.

Still not bad in my opinion... if someone diverted their 6.25 lotto money to buying a prize bond each week... after five years they'd have 250 bonds... or a 1 in 40,000 chance of winning the top prize per year.


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## Marc (30 Jun 2010)

Joe, you are correct 5.6m is the number of separate holdings or "households"

I don't have a copy of the latest accounts so I can't verify Camlin's numbers at the start of this thread. However, if all households held the same number of bonds, then the chances of a household winning the jackpot would be 1 in 5.6 M. But we know that everyone doesn't have the same allocation of bonds.

The crux of this problem therefore is working out the probability of winning based on a variable holding of bonds over a variable period of time. Sadly, this isn't as easy as dividing the prizes by the number of bonds.

The maths to do this has been cracked in the UK for Premium Bonds and the program took 3 months to develop by a post-doctoral cosmology statistician. The program takes 6 hours to run each month to update the numbers.So, back of fag packet guesses at the chances of winning will probably be extremely wide of the mark.


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## dubrov (30 Jun 2010)

Marc said:


> Dubrov, I don't understand your point.
> 
> I thought that the CAPM said (and I paraphrase here) that the expected return from a stock equals the investors' required rate of return which in turn equals the cost of equity capital for a stock.


 
Expected return is an inpuit to the model. I guess if the expected return never exceeds the risk free-rate then it would never be worth investing so I take your point. It is very subjective though when it comes to stocks.

Anyway, I think we are sort of agreeing. The difference comes from CAPM assuming that investors are risk-averse. i.e. they requrie a higher return for higher risk.

This is normally the case for investors. However, some people actually would like higher risk and Prize Bonds may may sense for them. Lottery players are similar in this respect albeit with much lower expected returns.

I'm not saying prize bonds are the best investment in the world but they have their place alongside other products.


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## NHG (30 Jun 2010)

A guy I work with won 3 prize bonds about 3 years ago and won €75 this week on one of those, I told him that he should buy 3 more with the €75 as he is very lucky.  I have some with a good number of years and have never won anything on them, but I do know a few people that have won €75, so I live in hope!


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## huskerdu (30 Jun 2010)

As with all investments, it is all depending on your clear understanding of the risks involved which a lot of people dont have.  

Don't forget, this country is full of people who didn't realise that buying a highly leveraged investment property with an interest only mortgage was a high risk investment. 

The average return from the prize bonds may be theoretically 3%, but in reality, as the figures here has shown, the actual average return for someone with prizebonds, is much lower and probably close to 0%. 
This is only a problem if you dont realise this and believe the marketing blurb that your "investment" is safe and haven't realised that your "investment" is being eroded over time by not keeping pace with inflation. 

I have a small number of prize bonds, which I consider a gamble, but a lower risk gamble than the lotto or the horses.


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## JoeB (2 Jul 2010)

I have examined the odds of winning in a little more detail. I have made a surprising discovery!

I'm assuming the following...
Total fund = 800 million.
total prizes, per year = 3% = 24 million
total of 12 x 1,000,000 prizes = 12 million
number bonds = 128 million


prizes = 12 x 1,000,000, one draw per month
1 x 20,000 per weekly draw
5 x 1,000 per weekly draw
10 x 250 per weekly draw
this leaves 2710 prizes of 75 Euro per weekly draw



Ok, so asking what the expected average return is is the wrong question, as the answer is always 3%, no matter how you look at it. So different questions need to be asked, such as .. how many bonds does one need to own in order to have a 50-50 chance of winning 3%, in a single year?



But I asked some other questions... for example, what proportion of your winnings should come from each of the prize values?, and this leads to an interesting discovery. Previous to 2007 there was no 1,000,000 prize, then in 2008 there was 4, now there are 12 x 1,000,000 per year.


Each bond worth 6.25 should get 3% per year, which would be 18.75 cents per year... so how much is contributed to this from each of the prize values????

Well, currently, with 12 x 1,000,000 prizes, the breakdown of each prize value is...
*1,000,000 contributes a massive 9.4 cents to the 18.75 cents, more than half!!! The bread and butter 75 Euro prizes contribute less, at 8.26 cents per year.*

This is a huge change... *when there were only 4 x 1,000,000 draws then the million prize only contributed a paltry 3.13 cents per year, and the 75 Euro prize contributed a massive 14.5 cents to the 18.75 cents yearly total.*

So increasing the number of 1,000,000 has drastically changed the game... now you are contributing over half of your supposed winnings to gambling on winning the top prize, which is unlikely. Previously you were only gambling about 15% of your winnings.

So now it is far more like an exceptionally fair lottery, with nearly perfect fairness, but no advantageous odds, they are very slightly below fair odds,.. not quite exactly fair due to rounding issues.



I also calculate that in order to have a 50-50 chance of winning your fair 3% in 75 Euros prizes you must own 455 Bonds, worth approx 2,840.. but I'm not 100% certain of this calculation. Some advice on how to add odds would be appreciated.



For example the odds of getting heads once in a coin toss is 50%... but getting one head from two throws is 75% (you can also get two heads), and getting exactly one head from two throws is 50%.

So if the odds of winning a prize per Bond are 1/10 say... what are the odds if you own two bonds, and either or both can win?.. is it 2/10? This is confusing as if you own 100 Bonds then the odds are 10-1 in your favour if you simple added the odds... so that can't be correct. 

And considering coin tosses... it's not clear how the odds of .5 on each throw, lead to odds of .75 when considering two throws???? But the .75 odds are absolutely correct, from two throws....


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## dubrov (2 Jul 2010)

Nice post.

It shows that if you have a decent enough size of bonds, you can roughly expect to be saving half the interest earned and gambling the other half to win the big prize with fair expectancy/




JoeBallantin said:


> So if the odds of winning a prize per Bond are 1/10 say... what are the odds if you own two bonds, and either or both can win


 
You easiest thing is to think abot this another way.

The odds of either or both to win = 1 - odds of both to lose

The odds of both losing are
(9/10 * 9/10) = 81/100

So The odds of either or both winning = 1-81/100 = 19/100

Another way is:

THe odds of exactly one winning is 2 * 1/10 * 9/10 = 18/100
(The two is because this can happen 2 ways, Bond A wins and B loses or viceversa)
THe odds of both winning= 1/10 & 1/10 = 1/100

Ths sum of the two still adds to 19/100


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## JoeB (3 Jul 2010)

Hi

That's great, thanks for the tips on combining odds.

So now I have new figures for the probability of winnning certain prizes with certain 
degrees of certainity. This idea of 'Degree of Certainity' is a good one. I got it from the following link.
http://saliu.com/theory-of-probability.html

The guy gives good info on how to calculate odds when doing multiple trials. I have to learn a little about logs before I can re-arrange some of the equations to get good answers.


But I've got the following so far.. still not sure if this is actually correct or not.

How many Bonds must one own in order to win the expected 3%, from only 75 euro prizes, with the following Degrees of Certainity.

50% certainity = 630 Bonds, value 3,938 Euros
99% certainity = 4,181 Bonds, value 26,130 Euros
99.9% certainity = 6,271 Bonds, value 39,194 Euros
99.99% certainity = 8,362 Bonds
99.999%  certainity = 10,452 Bonds

These figures for the Bonds are increasing in a arithmetic sequence when I add extra 9s to the 99.999%.. I don't think this is correct, I think the numbers should increase geometrically.. which is why I think I may have made a mistake.

i.e 2,4,6,8,10 = arithmetic
    2,4,8,16,32 = geometric

I'm interested in getting a full solution, any help, tips or pointers would be great.

Cheers


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## Plywood (6 Jul 2010)

I was thinking about this recently. I've studied probability but I really couldn't be bothered doing the math. What I have done though is I've bought 6,400 prize bonds (total spend €40,000). They way I see it I am forgoing around €600 in interest but if I only win a few €75 prizes it will reduce that. My capital is safe so I have limited downside (my interest or the erosion of my capital due to inflation over the period I keep the bonds) and a chance of a good upside. I will only keep them for six months as I think that they are a horrendous long term investment.

I have always been sceptical of prize bonds, as although I know quite a few people who have won decent prizes in the lotto, I have never met anyone who won a red cent on a prize bond. If I don't win anything (not even a €75 prize) I will have confirmed (for myself) that they are a waste of time.

I would never do this in a high interest rate environment but now is not a bad time to have a flutter.


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## JoeB (6 Jul 2010)

It'll be interesting to see how they perform. I reckon you should win a 75 prize every month perhaps, but I actually think you'll get about 500 back, probably as 6 or 7 x 75 prizes.

Your 3% would be 1,200... but about half the prizes are given as the 1,000,000 top prize... so I believe you are gambling about half your 1,200... i.e 600 Euro a year on winning the top prize. I'm not sure of this but I think you have about a 1 in 1666 of winning the top prize once in a year, with 6,400 bonds. That seems quite low to me, i.e quite good for you. But then, if 1666 people all invested 40,000 there'd be 66 million invested, and it's only 50-50 that one of them would win the 1,000,000.

I'm not sure about the later figures, especially the ones about the odds of winning the million. But I do think you'll win between 4 and 7 x 75 Euro prizes in twelve months.


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## Grizzly (7 Jul 2010)

Incidentally the Prize Bonds company ran a World Cup promotion to win tickets to South Africa when you made a purchase.
I have emailed them to find out who won the draw as I had invested heavily in Bonds during the promotion. 
To date nobody has even bothered to answer the email.


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## NorfBank (7 Jul 2010)

Interesting thread, thanks to the posters.

Plywood - good luck, hope you win the million


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## JoeB (7 Jul 2010)

One final point is that the winners are drawn by computer... I don't want to suggest that they've got this wrong but it's possible.

Computers are deterministic, and can't produce true random numbers. Poker sites for example will use hardware random number generators (RNGs).. i.e something like a geiger counter measuring background radiation (for example).. this would produce true random signals.

I believe it's possible that the draws might not be fair.. depending on how the software is written, and also if they have hardware RNGs. But if the draws aren't fair it still wouldn't be possible to use this fact to your advantage (maybe).

There are similarities to the E-Voting machines... and the question of whether software can be trusted, or verified to be absolutely correct???

There is a branch of computer science which can produce mathemathical proofs that the software is bug free and will work according to spec, but this is rare, and difficult to do, and may not be possible in the case of the Prize Bond raffle software. So there may be unknown bugs or patterns, in the drawing software.


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## Ash 22 (8 Jul 2010)

Just wondering with the prize bond draw, is there a certain amount of draws against each letter, lets say x amount for aa, ab and so on or is it a random draw? I might'nt be wording this clearly. Looking at the results for the 75 euro a pretty similar number of each letter seem to come out each week.


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## JoeB (8 Jul 2010)

Well, I don't think they give out information either on the frequency of the letters used in the Bond numbers, and whether or not they're in sequence etc..  or on how the draw is actually carried out, or whether or not there are sub-draws etc, or how the computer program to do the draw is implemented, and whether or not they have hardware RNGs.

This would be in contrast to the Irish Sweepstakes, where the draws were public, and clearly explained.. with all the entries entered in multiple drums, and gradually reduced down to the winning tickets.

It would be possible for them to examine the results over time, and to see if problems might exist... I don't know if they do this either.


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## Plywood (16 Aug 2010)

First progress report;

Won €75 in last Friday's draw. I bought these in mid June so it took 8 weeks to win a prize. Doesn't bode well for achieving my interest of €600 over the six months I intend to stay invested in them (the amount of interest I have forgone by investing in Prize Bonds as opposed to placing on deposit). I wouldn't have expected one prize a month or anything but it would be nice if they were regular. I reckon there is so many of these bonds in existence that you could win nothing for years and then three together. 

I was only saying to my wife last week that I would exit after 3 months instead of 6 but I'm tempted to stay in for the 6 now. 

Mad gambler that I am....

Vegas next....


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## Laramie (17 Aug 2010)

The Prize Bonds Company ran a draw for tickets to the world cup final in South Africa. To enter you had to purchase the minimum number of Prize Bonds allowed which was 4 and complete an entry form.
Jess and I decided to increase the number of Prize Bonds that we have by about €500 during this promotion bringing our holding to about €3500.
We decided to find out from the Prize Bond Company who won the draw so we sent off a few emails to various departments.  To date we have received no reply.
Being of a suspicious nature I am wondering if a draw was ever held. There is no mention anywhere, on any Prize Bond website of the draw or who the winner was.

Does anyone know anything about this or have a direct email address that I can contact to get an answer?

Clint


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## tvman (17 Aug 2010)

I think people are failing to take into account both the expected return and standard deviation of return for prize bonds. 

The expected return is 3% but this is meaningless on it's own, if investors are risk averse they will compare the expected return to the riskiness of the investment. In the case of prize bonds the capital is risk-free but the return element has a massive standard deviation - the payoff is asymmetric (i.e. yuo can't lose anything (in nominal terms) but you do have a small chance of winning -  so you can't really compare them to conventional investments like deposit a/cs, shares or bonds. They are more like a risk-free, zero return asset (the face value of the prize bond) plus a deep out of the money option (the possibility of winning a prize). I'm not great at option pricing but it should be fairly straightforward to value a prize bond playing around with black scholes.

My gut instinct would be that they are worth less than face value - I don't think the value of the option would outweigh the opportunity cost of holding the zero return investment when short term Irish gov't debt (the relevant risk free rate here given the prize bond would presumably be canceled in the event of a sovereign default) are so high.

tvman


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## Troy McClure (17 Aug 2010)

Let me tell you. I bought €3200 worth of prize bonds a year ago. We have won 3 times, €75 each time. €225 which I think is about 7% return off the top of my head.
If we could get a biggie that would really do it for us.


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## Palerider (23 Aug 2010)

I have also just purchased 8000 bonds, ( €50,000 ) I may as well after I went into EBS for the second time to open a 7 month fixed term deposit account, despite having spoken in advance by phone with the Branch Manager and having made an appointment I was still turned away and told I had to make another appointment, that's a laugh...Hello ?, EBS wakey wakey to the real world...I was a depositor, remember them ....anyways said I'd give Prize bonds a chance, the girl in the Post Office could not have been more helpful...6 months is my timeframe so we'll see..


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## Palerider (23 Jan 2011)

*Update*

Ok - update, interesting debates on the PB's tempted me .....so far after about 5 months I have ' won ' €525, had I placed the €50k on deposit at 3.5% then I would have netted about €532, I'm satisfied for now to stay in and considering an additional modest purchase, what I like is the fact that the Govt who already have their fingers even deeper in my pockets since the Budget don't get the dirt (  increased now to 27%, )  my ' winning's ' being tax free and not reportable on my form 11 tax return mean that I don't pay the additional 2% levy that featured on last years tax return either so all in all satisfied so far...

I probably should pay more attention to the underlying safety of these funds but I seem to be more satisfied with PB's than having any more in a deposit account.

PS - and it is kind of fun !


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## Grizzly (24 Jan 2011)

We have circa €3.5k in Prize Bonds and won €75 last year.


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## horusd (24 Jan 2011)

I has €2.500 in PB's for 2 yrs and didn't win a red cent!  Cashed em in (bar €400 ) and stuck it in shares.  It's odd tho. apart from the people talking about winnings here, I've never heard of anyone winning a bean.  Are people all coy about them or what?


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## hand_m (24 Jan 2011)

*Never won on Prize Bons*



horusd said:


> I has €2.500 in PB's for 2 yrs and didn't win a red cent!  Cashed em in (bar €400 ) and stuck it in shares.  It's odd tho. apart from the people talking about winnings here, I've never heard of anyone winning a bean.  Are people all coy about them or what?


.

I couldn't agree more. I bought 1000 Irish Punts worth of bonds 14 years ago and never won a red cent. I don't think there is anything dodgy I'm probably just unlucky.!!  Interesting to see on here that at least some people are winning. I personally have never met anyone who won and I know quite a few people who have bonds.


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## iamaspinner (24 Jan 2011)

€3,000 (1,500 in late 2008 and another 1,500 recently). Have won 3 €75 prices. Not bad I suppose!


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## kdoc (24 Jan 2011)

I have €20,000 worth of PB's for the last 18 months and I have won 4 prizes of €75 each. Not a good investment but I'll let the dream live on for another while.


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## Frank Grimes (24 Jan 2011)

Just started a Direct Debit of €25 (4 prize bonds) per month as a replacement for my Euromillions monthly spend. Under no illusions as to the expected return, I am content with winning a million being a dream. I'm thinking of it as a no lose lottery. Plus next month I will have 8 bonds, so I've halved my odds of a prize win, and the same in 4 months, then 8 and so on - ( I am probably utterly wrong statistically but please let me remain happily ignorant) It's a bit of fun


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