Premium Bonds Explained
by admin ~ August 21st, 2008 . Filed under: Investing .
Issued by the UK government’s National Savings and Investments scheme, premium bond is an easy and secure method to save money along with a chance of winning tax-free prizes. It ensures investors that their capital stays 100% safe. Normally, there are two types of premium bonds - non callable bonds and callable bonds.
A premium bondholder invests money in the government. Instead of paying interest to bond holders, the government pays money into a prize fund and provides the bondholder a chance to win tax-free prizes. Premium bonds cannot be kept in joint names and aren’t transferable to another person. Among the leading advantages is that all or a part of premium bonds can be cashed any time you want.
A individual can buy the national savings bond either over the phone or by becoming an application directly from the local post office. However, a individual who wishes to purchase Premium bonds can even download the application form from the Internet. The Premium bonds are generally sold in multiples of £ten. A person investing in this type of bond has to establish a minimum investment of £100. Nevertheless, the investment in case of these bonds can go as high as £30,000. Anyone who is 16 years or more are eligible for making investment in these bonds. Nevertheless, in case of children and individuals below 16 years, Premium bonds are typically bought by their guardians or parents.
Bonds are subject to credit risk. That means that the bond is only valid as long as the company that issued it can pay the interest and the par value back. Just like a loan from a bank there is always the risk that it won’t be paid back.
Secondly, bonds are subject to inflation risk. Inflation is the annual increase in the costs of goods coupled with the decreasing value of the dollar. Iother}} words our $1 won’t buy next year what it will purchase this year. The average inflation rate over the last 50 years is 3-four%. So, if we are earning6% on a bond and inflation is three%, then after few years we start to lose value on the money since our primary investment does not grow. While bonds are great for income during retirement over time we lose the purchasing power essential to maintain a cost of living. Bonds should be a part of your portfolio whether they are in your mutual funds or you own them directly. The significant thing is to understand the their role and their risks.
By: Michael Kettunen
About the Author:
A premium bondholder invests money in the government. Instead of paying interest to bond holders, the government pays money into a prize fund and provides the bondholder a chance to win tax-free prizes. Premium bonds cannot be kept in joint names and aren’t transferable to another person. Among the leading advantages is that all or a part of premium bonds can be cashed any time you want.
A individual can buy the national savings bond either over the phone or by becoming an application directly from the local post office. However, a individual who wishes to purchase Premium bonds can even download the application form from the Internet. The Premium bonds are generally sold in multiples of £ten. A person investing in this type of bond has to establish a minimum investment of £100. Nevertheless, the investment in case of these bonds can go as high as £30,000. Anyone who is 16 years or more are eligible for making investment in these bonds. Nevertheless, in case of children and individuals below 16 years, Premium bonds are typically bought by their guardians or parents.
Bonds are subject to credit risk. That means that the bond is only valid as long as the company that issued it can pay the interest and the par value back. Just like a loan from a bank there is always the risk that it won’t be paid back.
Secondly, bonds are subject to inflation risk. Inflation is the annual increase in the costs of goods coupled with the decreasing value of the dollar. Iother}} words our $1 won’t buy next year what it will purchase this year. The average inflation rate over the last 50 years is 3-four%. So, if we are earning6% on a bond and inflation is three%, then after few years we start to lose value on the money since our primary investment does not grow. While bonds are great for income during retirement over time we lose the purchasing power essential to maintain a cost of living. Bonds should be a part of your portfolio whether they are in your mutual funds or you own them directly. The significant thing is to understand the their role and their risks.
By: Michael Kettunen
About the Author:
Visit National Savings Bond blog for more info.
Len Yetter
