Prize Bonds are looking attractive alternatives to deposits
- Thread starter Raging Bull
- Start date
But, unless you buy a new issue (something that's probably not an option for a retail investor?), won't such expectations/projections be already factored into the market price for a bond so there's no free lunch here?
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If you buy a Government Bond on the secondary market, the interest you earn is built-in at the time of purchase assuming you hold the bond until maturity.
So future rises in the interest rate will not increase the interest you earn at all and, if you have to sell the bond before maturity, you will probably make a capitial loss as the price will be below what you paid to buy it
So future rises in the interest rate will not increase the interest you earn at all and, if you have to sell the bond before maturity, you will probably make a capitial loss as the price will be below what you paid to buy it
yes but its still a hell of a lot better than a prize bond, if you only buy a relatively short dated one not greater than 10 years, you dont have to worry about bond price fluctuations you just hold it to maturity, Yes interest rates will probably continue to rise so just gradually invest the money to take advantage of falling bond prices, I'm just introducing government bonds to point out what a lousy deal prize bonds are
Prize Bond prizes will increase in the next few months as the prize fund is based on interest rates
Two year Irish government bonds are currently yielding 1.952% assuming a marginal tax rate of 52% that’s 0.94%pa net of tax.
By contrast the prize bond fund is currently paying 0.35% but you won’t earn that rate unless you have a very large holding for an infinite period. So assume less than this in practice.
But the real issue is that inflation is currently running at or near 9%pa and interest rates are increasing around the world.
interest rates peaked in about 1990 and have been broadly falling ever since. That’s 30 odd years since we have had to deal with a period of rising interest rates and high inflation.
Some thoughts
Think of your mortgage like a bank account with a negative interest rate. As rates increase your mortgage gets more expensive.
Many people have stretched their borrowings to the max based on the affordability of previously zero interest rates.
So, even a small increase in mortgage rates will impact many households already stretched financially and even more so given higher energy costs.
Don’t think you can beat the bank. If you have cash lying around in deposit accounts or state savings think about knocking some off the debt. But try and keep your mortgage payment the same.
That will accelerate the debt repayment.
Equally don’t be persuaded to invest in a unit linked insurance bond and keep your mortgage or other debt.
The tax is 41% of the profit and it’s therefore highly unlikely that you would ever profit from this.
Bond markets move inversely to interest rates so while we now see, for example, many US corporate bonds now paying yields of more than 4% in order to get there the price of bonds has fallen sharply this year.
Deposit rates should creep up slightly but don’t expect miracles. A one year fixed deposit is typically only paying 0.05% currently.
Look out for new issues of state savings certificates at higher interest rates than currently available. Again don’t expect miracles but we should see new certificates coming out at higher rates in the future.
Annuity rates for pensions have shot up this year from albeit historically low levels. We are monitoring this market extremely closely.
By contrast the prize bond fund is currently paying 0.35% but you won’t earn that rate unless you have a very large holding for an infinite period. So assume less than this in practice.
But the real issue is that inflation is currently running at or near 9%pa and interest rates are increasing around the world.
interest rates peaked in about 1990 and have been broadly falling ever since. That’s 30 odd years since we have had to deal with a period of rising interest rates and high inflation.
Some thoughts
Think of your mortgage like a bank account with a negative interest rate. As rates increase your mortgage gets more expensive.
Many people have stretched their borrowings to the max based on the affordability of previously zero interest rates.
So, even a small increase in mortgage rates will impact many households already stretched financially and even more so given higher energy costs.
Don’t think you can beat the bank. If you have cash lying around in deposit accounts or state savings think about knocking some off the debt. But try and keep your mortgage payment the same.
That will accelerate the debt repayment.
Equally don’t be persuaded to invest in a unit linked insurance bond and keep your mortgage or other debt.
The tax is 41% of the profit and it’s therefore highly unlikely that you would ever profit from this.
Bond markets move inversely to interest rates so while we now see, for example, many US corporate bonds now paying yields of more than 4% in order to get there the price of bonds has fallen sharply this year.
Deposit rates should creep up slightly but don’t expect miracles. A one year fixed deposit is typically only paying 0.05% currently.
Look out for new issues of state savings certificates at higher interest rates than currently available. Again don’t expect miracles but we should see new certificates coming out at higher rates in the future.
Annuity rates for pensions have shot up this year from albeit historically low levels. We are monitoring this market extremely closely.
Duke of Marmalade
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Oops! Yes that was a mistaken throwback to the previous rates. On that same day I posted an accurate spreadsheet of the current position.No worries. I didn't realise that things had changed since you posted in early 2022.
podgerodge
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Hi @Duke of Marmalade have you an update on this that reflects the new 1% fund? Thanks! I know it's less than fixed deposits or indeed on demand Advanzia etc. but I guess with a significant amount invested (over 100k?) you'd average out at the 1%, being equivalent to 1.5% deposit subject to DIRT? And a chance of winning big!
Duke of Marmalade
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I posted it on the day of the announcement but here it is again with €100k. I really only take seriously the €75 wins which average 0.79% p.a. For €100k there is a 50% chance you will receive between 0.6% and 0.9% in a year in €75 prizes, tax free of course. I have decided to hold on to mine even though UK Premium Bonds pay 4% p.a.; we are being seriously ripped off by NTMA.
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podgerodge
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Thanks @Duke of Marmalade !
podgerodge
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Well the rate has now trebled so something very wrong if you don't see an upswing. Keep us informed!
That is absolutely shocking to be honest. 0.15 % return at 400K ?
Duke of Marmalade
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For the 3 months October to December these are the chances of your €75 wins on €200k:
moneymakeover
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Can you explain that table?
It goes up and then down
I would have thought the chances of winning more would just decrease
thedaddyman
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I was on holidays earlier this year in the West of Ireland where I bought a ticket in a shop for the local GAA club lotto when I was buying a cup of coffee. For a €5 "investment", I got a phonecall later in the week saying I'd won €25 and could they have my address to post out the cheque as they didn't know who I was. So my ROI was 400%
By the definition, I should be buying lotto tickets for every GAA club in the country as I'd make 400% out of it !
Prize bonds are just raffle tickets, the only difference being that you get your original amount back. Except you don't because of inflation. If someone (as one poster has said on here) had €400k invested in Prize bonds, then with CPI running at around 7%, in effect, they've lost €28k this year, unless their raffle ticket gets lucky
By all means, have a few savings bonds for a bit of fun, or as a present to a kid etc and you never know, you might get lucky. But the chances are you won't. It's not a savings strategy, it's a strategy to depreciate your cash
By the definition, I should be buying lotto tickets for every GAA club in the country as I'd make 400% out of it !
Prize bonds are just raffle tickets, the only difference being that you get your original amount back. Except you don't because of inflation. If someone (as one poster has said on here) had €400k invested in Prize bonds, then with CPI running at around 7%, in effect, they've lost €28k this year, unless their raffle ticket gets lucky
By all means, have a few savings bonds for a bit of fun, or as a present to a kid etc and you never know, you might get lucky. But the chances are you won't. It's not a savings strategy, it's a strategy to depreciate your cash
It shows the probability of the indicated number (0 to 12) of €75 wins over three monthly draws given a Prize Bond holding of €200K (32,000 individual bonds).
It's basically a Bell Curve.
If you extended it out past 12 wins it would.
Duke of Marmalade
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@ClubMan has explained it but for further clarification I attach an improved version. For example the most likely outcome is exactly 5 wins with a 17.4% chance. There is a 57.1% chance that there will be no greater number of wins. It is theoretically possible that with 32,000 bonds you win every single one of the c.10,000 €75 prizes every week. But to all intents the chances of you winning more than 14 €75 prizes in total is Nil.
Duke of Marmalade
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Prize bonds are a genuine alternative to deposits. The more so the greater the investment because of the law of large numbers. Ignore the big prizes, as I do*. The tax free return in €75 prizes is 0.79%. This beats our high street banks.
The inflation comparison is of course relevant but quite irrelevant in terms of choosing where to invest your deposits.
* Though it does sort of satisfy any lotto fantasy that I might have. Every Friday I have as much chance of a big win as with the Lotto and the "thrill" of looking up the result. That is simply icing on the cake.