Premium bond in general is a bond that is priced higher than its par value as opposite to discounted bond. This is occurs because the interest rate on the bond is higher than the prevailing rates in the market, making the premium bond worth more than a bond paying a lower rate.
The UK’s premium bond is a lottery bond scheme by
National Savings and Investments of United Kingdom. This premium bond was introduced by Harold Macmillan in his 1956 budget. The government will buy back the bond, on request for its original price. The government also pay the interest on the bond (pegged at 1.5% in July 2010) but instead of the interest being paid into individual accounts, it is paid into a prize fund from which a monthly lottery distributes tax-free prizes, or premiums, to those bond-holders whose numbers are selected randomly. The random number will be generated by ERNIE (Electronic Random Number Indicator Equipment). The prizes raging from £50 to the top prize of £1,000,000.
Investors can purchase bonds at any time; bonds need to be held for a full calendar month after the month you buy them, e.g purchase in January eligible for March, their bonds are eligible for the draw: their numbers are entered each month, with an equal chance of winning any prize, until the bond is cashed in.
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