Difference between revisions of "Buy Premium Bonds"
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| − | Premium bonds are divided into two categories. One type is a specific type of lottery bond sold by National Savings and Investments (NS&I), located in the United Kingdom (UK). NS&I Premium Bonds are backed by Her Majesty's Treasury, the financial arm of the United Kingdom's government.<ref>www.nsandi.com/files/published_files/asset/pdf/premium-bonds-brochure.pdf</ref> Instead of receiving interest after a certain amount of time elapses (as with most bonds), premium bonds are akin to lottery tickets.<ref | + | Premium bonds are divided into two categories. One type is a specific type of lottery bond sold by National Savings and Investments (NS&I), located in the United Kingdom (UK). NS&I Premium Bonds are backed by Her Majesty's Treasury, the financial arm of the United Kingdom's government.<ref name="rf1">www.nsandi.com/files/published_files/asset/pdf/premium-bonds-brochure.pdf</ref> Instead of receiving interest after a certain amount of time elapses (as with most bonds), premium bonds are akin to lottery tickets.<ref name="rf1" /> The other type of premium bond is one that is sold for higher than its face value.<ref name="rf2">http://www.investopedia.com/terms/p/premiumbond.asp</ref> |
[[Category:Financial Bonds]] | [[Category:Financial Bonds]] | ||
== Steps == | == Steps == | ||
=== Buying Premium Bonds in the United Kingdom === | === Buying Premium Bonds in the United Kingdom === | ||
| − | #Decide if NS&I Premium Bonds are right for you. NS&I Premium Bonds are a savings account you can put money into and redeem at any time without penalty. Note that you cannot get withdraw your investment instantly like a bank account or ISA.<ref>http://www.nsandi.com/premium-bonds</ref> With these bonds, the interest you earn is based on a lottery system. Your bond number is put in a system that randomly draws a certain number of bonds per month one calendar month after purchase and will continue to be entered until you cash in your bonds.<ref>http://www.moneysavingexpert.com/savings/premium-bonds</ref> Those bond numbers are paid various amounts, up to 1 million pounds. You are not guaranteed to win anything in a given month. All of the interest that is paid is tax free in the United Kingdom.<ref>http://www.nsandi.com/premium-bonds?tabid=e%20http%3A//www.nsandi.com/savings-premium-bonds%3Ftabid%3De</ref>,<ref>http://www.economist.com/node/4107042</ref> | + | #Decide if NS&I Premium Bonds are right for you. NS&I Premium Bonds are a savings account you can put money into and redeem at any time without penalty. Note that you cannot get withdraw your investment instantly like a bank account or ISA.<ref name="rf3">http://www.nsandi.com/premium-bonds</ref> With these bonds, the interest you earn is based on a lottery system. Your bond number is put in a system that randomly draws a certain number of bonds per month one calendar month after purchase and will continue to be entered until you cash in your bonds.<ref name="rf4">http://www.moneysavingexpert.com/savings/premium-bonds</ref> Those bond numbers are paid various amounts, up to 1 million pounds. You are not guaranteed to win anything in a given month. All of the interest that is paid is tax free in the United Kingdom.<ref name="rf5">http://www.nsandi.com/premium-bonds?tabid=e%20http%3A//www.nsandi.com/savings-premium-bonds%3Ftabid%3De</ref>,<ref name="rf6">http://www.economist.com/node/4107042</ref> |
| − | #*One benefit to Premium Bonds is that your initial investment is very safe. The NS&I is backed by the Treasury. The maximum you can put into Premium bonds is 50,000 pounds, and this entire sum would be guaranteed by the government. <ref | + | #*One benefit to Premium Bonds is that your initial investment is very safe. The NS&I is backed by the Treasury. The maximum you can put into Premium bonds is 50,000 pounds, and this entire sum would be guaranteed by the government. <ref name="rf4" /> |
| − | #*While there is a chance of winning a very large sum, the odds of winning 1 million pounds is 1 in 27 billion per each 1 pound bond. Your odds of winning 25 pounds is 1 in 26 thousand per each 1 pound bond.<ref> http://www.moneysavingexpert.com/savings/premium-bonds</ref> So, most people will not win enough to match the current interest rate. | + | #*While there is a chance of winning a very large sum, the odds of winning 1 million pounds is 1 in 27 billion per each 1 pound bond. Your odds of winning 25 pounds is 1 in 26 thousand per each 1 pound bond.<ref name="rf7"> http://www.moneysavingexpert.com/savings/premium-bonds</ref> So, most people will not win enough to match the current interest rate. |
#*On average, you can expect to win what the current established interest rate is (currently 1.35%). Therefore, it is only worthwhile if you cannot get more from a high interest savings account, or if you are willing to risk a lower return for a small chance of a much higher return. | #*On average, you can expect to win what the current established interest rate is (currently 1.35%). Therefore, it is only worthwhile if you cannot get more from a high interest savings account, or if you are willing to risk a lower return for a small chance of a much higher return. | ||
| − | #Have your starting investment ready. You need at least 100 pounds to start your investment in NS&I Premium Bonds,<ref>http://www.nsandi.com/premium-bonds?tabid=e%20http%3A//www.nsandi.com/savings-premium-bonds%3Ftabid%3De#tab0</ref> though you can begin with 50 pounds if you commit to a purchase per month. Each bond is 1 pound.<ref | + | #Have your starting investment ready. You need at least 100 pounds to start your investment in NS&I Premium Bonds,<ref name="rf8">http://www.nsandi.com/premium-bonds?tabid=e%20http%3A//www.nsandi.com/savings-premium-bonds%3Ftabid%3De#tab0</ref> though you can begin with 50 pounds if you commit to a purchase per month. Each bond is 1 pound.<ref name="rf1" /> |
| − | #Apply online. You will need to fill in basic information, such as your name, your phone number, and your address. You'll also need you debit card information. Make sure it is one from a UK Bank. If you've registered online or by the phone, you'll need your NS&I identification number and your password, as well as your holder number.<ref | + | #Apply online. You will need to fill in basic information, such as your name, your phone number, and your address. You'll also need you debit card information. Make sure it is one from a UK Bank. If you've registered online or by the phone, you'll need your NS&I identification number and your password, as well as your holder number.<ref name="rf1" /> |
#*You can apply online at www.nsandi.com. | #*You can apply online at www.nsandi.com. | ||
| − | #* Fill out the form. You'll need to answer questions such as how you want your notifications sent to you, as well as whether you want your awards cashed or reinvested as bonds.<ref>https://secure2.nsandi.com/kyudob2cnsi/jsp/authenticationB2PNSIEN.jsp</ref> | + | #* Fill out the form. You'll need to answer questions such as how you want your notifications sent to you, as well as whether you want your awards cashed or reinvested as bonds.<ref name="rf9">https://secure2.nsandi.com/kyudob2cnsi/jsp/authenticationB2PNSIEN.jsp</ref> |
| − | #Apply by phone. You can also apply by phone. You'll still need to have all of the same information on hand to give to the representative.<ref>http://www.nsandi.com/how-do-i-get-touch</ref> | + | #Apply by phone. You can also apply by phone. You'll still need to have all of the same information on hand to give to the representative.<ref name="rf10">http://www.nsandi.com/how-do-i-get-touch</ref> |
| − | #* Call 0500 500 000 to buy bonds.<ref | + | #* Call 0500 500 000 to buy bonds.<ref name="rf10" /> |
| − | #Apply at a Post Office. You can fill out an application at the Post Office and pay for bonds on the spot. You will make out the check to Post Office Ltd.<ref | + | #Apply at a Post Office. You can fill out an application at the Post Office and pay for bonds on the spot. You will make out the check to Post Office Ltd.<ref name="rf8" /> |
| − | #Apply by mail. You can send in a check by mail along with your application for NS&I Premium Bonds. The application is available online. Make the check payable to National Savings and Investments,<ref | + | #Apply by mail. You can send in a check by mail along with your application for NS&I Premium Bonds. The application is available online. Make the check payable to National Savings and Investments,<ref name="rf8" /> and send it with the application to NS&I, Glasgow, G58 1SB.<ref name="rf10" /> |
| − | #Purchase more bonds as needed. Each time you buy bonds, you must meet the minimum investment of 100 pounds or 50 pounds with a per-month purchase. You can purchase more bonds in your name the same way you purchase your initial bonds or by one of the other methods laid out in this article.<ref | + | #Purchase more bonds as needed. Each time you buy bonds, you must meet the minimum investment of 100 pounds or 50 pounds with a per-month purchase. You can purchase more bonds in your name the same way you purchase your initial bonds or by one of the other methods laid out in this article.<ref name="rf8" /> |
| − | #Know the limits. As of 2015, you can only hold a total of 50,000 pounds in NS&I Premium Bonds.<ref | + | #Know the limits. As of 2015, you can only hold a total of 50,000 pounds in NS&I Premium Bonds.<ref name="rf1" /> |
=== Buying Premium Bonds in the United States === | === Buying Premium Bonds in the United States === | ||
| − | #Check your local laws. Gambling and lottery laws vary by location. NS&I Premium Bonds are technically a lottery bond, so it may or may not be legal to buy them i your state.<ref>http://www.nsandi.com/i-live-outside-uk-can-i-invest-with-nsi</ref> | + | #Check your local laws. Gambling and lottery laws vary by location. NS&I Premium Bonds are technically a lottery bond, so it may or may not be legal to buy them i your state.<ref name="rf11">http://www.nsandi.com/i-live-outside-uk-can-i-invest-with-nsi</ref> |
| − | #*Any interest, dividends and capital gains are subject to U.S. tax. You should receive either a 1099-DIV or 1099-INT at the end of the year, which will tell you whether or not you paid foreign taxes. If you did pay foreign taxes, you may claim a tax credit or itemized deduction on your tax return.<ref>http://www.investopedia.com/articles/personal-finance/012214/understanding-taxation-foreign-investments.asp</ref> | + | #*Any interest, dividends and capital gains are subject to U.S. tax. You should receive either a 1099-DIV or 1099-INT at the end of the year, which will tell you whether or not you paid foreign taxes. If you did pay foreign taxes, you may claim a tax credit or itemized deduction on your tax return.<ref name="rf12">http://www.investopedia.com/articles/personal-finance/012214/understanding-taxation-foreign-investments.asp</ref> |
| − | #Apply by mail. You will need to print off the online application. You will need to provide information such as your name, address, and debit card information.<ref | + | #Apply by mail. You will need to print off the online application. You will need to provide information such as your name, address, and debit card information.<ref name="rf11" /> |
| − | #Create a UK bank account. You need UK bank account to purchase NS&I Premium Bonds.<ref | + | #Create a UK bank account. You need UK bank account to purchase NS&I Premium Bonds.<ref name="rf11" /> You may run into to some difficulty opening up a British account, as no bank must accept overseas clients.<ref name="rf13">http://www.theguardian.com/money/2014/aug/22/canadian-uk-bank-account-open-refused</ref> |
| − | #* The easiest way to set up a British bank account is to contact your bank to see if it has a U.K.branch. Because you already have an account, you may find it easier to convince them to open a British account for you.<ref | + | #* The easiest way to set up a British bank account is to contact your bank to see if it has a U.K.branch. Because you already have an account, you may find it easier to convince them to open a British account for you.<ref name="rf13" /> |
| − | #Decide on your investment. You must invest at least 100 pounds, equal to 100 bonds, or 50 pounds, equal to 50 bonds, if you commit to a per-month purchase.<ref | + | #Decide on your investment. You must invest at least 100 pounds, equal to 100 bonds, or 50 pounds, equal to 50 bonds, if you commit to a per-month purchase.<ref name="rf1" /> As of August 2015, 1 pound is equal to $1.57 USD.<ref name="rf14">/http://www.xe.com/currencyconverter/convert/?Amount=1&From=GBP&To=USD</ref> |
| − | #Register for online and phone service. Once you've applied by mail, you can use that information to set up an account by phone or internet.<ref | + | #Register for online and phone service. Once you've applied by mail, you can use that information to set up an account by phone or internet.<ref name="rf11" /> You'll need to make certain investment decisions, such as whether you want your winnings reinvested into bonds or not.<ref name="rf9" /> You can also register as or register someone else as Power of Attorney to make and manage your investments.<ref name="rf15">http://www.nsandi.com/files/published_files/asset/pdf/power-of-attorney-leaflet.pdf</ref> |
| − | #Purchase your bonds. You can purchase up to 50,000 pounds worth of bonds. Once you hold them, the British government should notify you if you win a prize amount.<ref | + | #Purchase your bonds. You can purchase up to 50,000 pounds worth of bonds. Once you hold them, the British government should notify you if you win a prize amount.<ref name="rf1" /> |
=== Buying Regular Bonds at a Premium === | === Buying Regular Bonds at a Premium === | ||
| − | #Learn basic bond terminology. While premium bonds refer to the specific savings bond in the U.K. whereby winnings are determined by a lottery draw, it can also refer to the act of buying Government or Corporate bonds in the U.S. at a premium. To understand this, it is important to understand how bonds work and basic bond terminology.<ref>http://www.investopedia.com/articles/bonds/08/bond-market-basics.asp</ref> | + | #Learn basic bond terminology. While premium bonds refer to the specific savings bond in the U.K. whereby winnings are determined by a lottery draw, it can also refer to the act of buying Government or Corporate bonds in the U.S. at a premium. To understand this, it is important to understand how bonds work and basic bond terminology.<ref name="rf16">http://www.investopedia.com/articles/bonds/08/bond-market-basics.asp</ref> |
| − | #*'''A bond''' simply refers to a type of investment, where an investor (also known as the bondholder) lends money to a business or government for a set period of time, and receives interest. In lending the money, the lender is purchasing a bond, which is essentially a certificate indicating that the borrowers owes the money back by a set date, and that the lender is entitled to receive interest payments at an agreed upon rate.<ref>http://www.investopedia.com/terms/b/bond.asp</ref> | + | #*'''A bond''' simply refers to a type of investment, where an investor (also known as the bondholder) lends money to a business or government for a set period of time, and receives interest. In lending the money, the lender is purchasing a bond, which is essentially a certificate indicating that the borrowers owes the money back by a set date, and that the lender is entitled to receive interest payments at an agreed upon rate.<ref name="rf17">http://www.investopedia.com/terms/b/bond.asp</ref> |
#*'''Maturity date:''' Refers to the date the bond matures, or the date that the borrower (also known as the bond issuer), repays the value of the bond to the bondholder. | #*'''Maturity date:''' Refers to the date the bond matures, or the date that the borrower (also known as the bond issuer), repays the value of the bond to the bondholder. | ||
#*'''Face value (also known as par value)''': Refers to the amount paid to the bondholder at the maturity date. If the face value of a bond is $1000, you will receive $1000 at the maturity date. | #*'''Face value (also known as par value)''': Refers to the amount paid to the bondholder at the maturity date. If the face value of a bond is $1000, you will receive $1000 at the maturity date. | ||
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#*A previously issued bond with a coupon of 5% would sell at $1,250 to provide the same current yield as a bond with a coupon value of 4%. ($50/$1250 = 4% current yield; $40/$1000 = 6% current yield). Bonds whose market value is greater than premium value are known as premium bonds or bonds with a premium. An investor purchasing premium bonds would receive a current yield equal to market rates and a capital loss at maturity when the bond is redeemed at $1000. | #*A previously issued bond with a coupon of 5% would sell at $1,250 to provide the same current yield as a bond with a coupon value of 4%. ($50/$1250 = 4% current yield; $40/$1000 = 6% current yield). Bonds whose market value is greater than premium value are known as premium bonds or bonds with a premium. An investor purchasing premium bonds would receive a current yield equal to market rates and a capital loss at maturity when the bond is redeemed at $1000. | ||
#*The tax treatments for premium and discount bonds can be complex with some investors amortizing a portion of the expected capital gain or loss each year. For further details, review IRS Publication 550 and see a tax professional for advice. | #*The tax treatments for premium and discount bonds can be complex with some investors amortizing a portion of the expected capital gain or loss each year. For further details, review IRS Publication 550 and see a tax professional for advice. | ||
| − | #There can be a few advantages to paying a premium for a bond, and it is not uncommon for investors to pay a small premium when purchasing one.<ref>https://www.aamlive.com/blog/201303/why-would-anyone-pay-a-premium-for-a-bond</ref> | + | #There can be a few advantages to paying a premium for a bond, and it is not uncommon for investors to pay a small premium when purchasing one.<ref name="rf18">https://www.aamlive.com/blog/201303/why-would-anyone-pay-a-premium-for-a-bond</ref> |
#*Premium bonds can provide greater cash flow. The reason the premium exists is because the bond offers higher coupon rates than other bonds with lower coupon rates. While it does cost more at first to purchase a bond at a premium, over the course of the bonds life, the higher costs can be offset by higher cash flows over time. While the excess interest is essentially the return of your own money, the higher cash flows mean that the time it takes to recover your initial investment is lower. This concept is know as duration - the measure of time a bond will take to return the investor’s principal. | #*Premium bonds can provide greater cash flow. The reason the premium exists is because the bond offers higher coupon rates than other bonds with lower coupon rates. While it does cost more at first to purchase a bond at a premium, over the course of the bonds life, the higher costs can be offset by higher cash flows over time. While the excess interest is essentially the return of your own money, the higher cash flows mean that the time it takes to recover your initial investment is lower. This concept is know as duration - the measure of time a bond will take to return the investor’s principal. | ||
#*Premium bonds can provide protection when interest rates rise due to their shorter duration. Remember that when interest rates rise, bond prices fall. Premium bonds, however, generally do not lose as much value when interest rates rise as a bond trading at face value, or at less then face value, (also known as at a discount). If you believe interest rates are rising, buying a bond at a premium could be a smart decision. | #*Premium bonds can provide protection when interest rates rise due to their shorter duration. Remember that when interest rates rise, bond prices fall. Premium bonds, however, generally do not lose as much value when interest rates rise as a bond trading at face value, or at less then face value, (also known as at a discount). If you believe interest rates are rising, buying a bond at a premium could be a smart decision. | ||
| − | #Understand the risk of buying bonds at a premium. The main risk to purchasing a premium bond is the risk of it being "called early". If interest rates fall, it is possible the bond issuer will want to refinance the bonds at a lower interest rate, and may therefore "call the bond", which would force you to sell early. Although you may be paid a premium for being called early, it is still possible to lose money. Ask your broker if a bond is callable (has an option of being called early), before purchasing.<ref>http://www.investopedia.com/articles/bonds/05/052305.asp</ref> | + | #Understand the risk of buying bonds at a premium. The main risk to purchasing a premium bond is the risk of it being "called early". If interest rates fall, it is possible the bond issuer will want to refinance the bonds at a lower interest rate, and may therefore "call the bond", which would force you to sell early. Although you may be paid a premium for being called early, it is still possible to lose money. Ask your broker if a bond is callable (has an option of being called early), before purchasing.<ref name="rf19">http://www.investopedia.com/articles/bonds/05/052305.asp</ref> |
#*If a callable bond interests you, look for callable bonds with "call protection". These allow you to own the bond for a period of usually several years without needing to worry about the bond being called back, regardless of what happens to interest rates. Ask your broker which bonds have call protection. | #*If a callable bond interests you, look for callable bonds with "call protection". These allow you to own the bond for a period of usually several years without needing to worry about the bond being called back, regardless of what happens to interest rates. Ask your broker which bonds have call protection. | ||
== Tips == | == Tips == | ||
| − | * You must be 16 to purchase bonds Premium Bonds in the UK. If you are under the age of 16, premium bonds can be bought on your behalf by parents, grandparents, great-grandparents, or legal guardians.<ref | + | * You must be 16 to purchase bonds Premium Bonds in the UK. If you are under the age of 16, premium bonds can be bought on your behalf by parents, grandparents, great-grandparents, or legal guardians.<ref name="rf1" /> |
== Related Articles == | == Related Articles == | ||
