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A prize bond is a non-interest bearing security that is sometimes issued by a government as a means of generating working capital for government projects. The approach functions somewhat like a lottery, in that each person holding the bond is eligible to receive some type of cash prize each time a drawing is made. The investor does not have to continually re-enter the drawing as long as he or she holds at least one prize bond. In most nations that use this model, any winnings generated from the drawings are considered tax-free.
While several nations around the world use a prize bond model, the most well known example is the Republic of Ireland. The bonds were first issued during the late 1950s, with the bonds and the drawings structured to comply with the provisions found in the Finance Act of 1956. During the early years, the Bank of Ireland functioned as the overseer of the issuance of the bonds and the execution of the annual drawing. Over the years, the frequency of the drawing increased, moving from an annual event to a weekly event in the early 1990s. The drawing is currently held at the Post Office in Dublin each Friday, with the results announced to the media immediately.
It is important to note that a prize bond does not provide any type of returns in the form of interest payments. The investor only earns a return if he or she actually wins some sort of prize during one of the weekly drawings. Fortunately, the bonds are relatively inexpensive, making it possible to participate without tying up a great deal of money in the process. In the interim, participation in the bond issue is seen as one way to raise funds that the government can then use to make improvements to services offered to all residents of the country. From this perspective, even those who do not participate in the drawing by purchasing a prize bond ultimately enjoy at least some benefit from the project.
While a prize bond does not earn any type of interest for the holder, the bond does continue to hold its face value. This means that at any time the investor desires, he or she may cash in the bonds, receiving the same amount originally paid for them. In some nations, there is a waiting period that must take place between the purchase and the sale of the bond, but this is not a universal stipulation. Selling back the bonds does not in any way bar the investor from purchasing new bonds at a later date, when his or her financial circumstances make it possible to do so.