Prize Bonds are looking attractive alternatives to deposits

Raging Bull

Frequent Poster
Messages
252
Prize Bonds being tax free are starting to look attractive again but you'd have to be buying 4k worth to have a decent chance of a prize
 

Brendan Burgess

Founder
Messages
41,035
Prize Bonds being tax free are starting to look attractive again but you'd have to be buying 4k worth to have a decent chance of a prize
The interest rate currently being used to determine the prizes is 1.75% tax free. www.prizebonds.ie

This is a comparably attractive rate.
You can access the money at any time - no penalties

Compared to the 1.375% (2.5% gross) you can get on the best instant access deposits, this is indeed attractive.


Even if you win nothing, you are giving up only 1.375%.

It was different when rates were 5%.
 
  • Like
Reactions: SN9

Evander73

Frequent Poster
Messages
24
Prize Bonds being tax free are starting to look attractive again but you'd have to be buying 4k worth to have a decent chance of a prize
In my experience, you'd need to be very lucky to win anything substantial on a 4k investment in prize bonds, as there are currently approximately 280 million of them held.

I suppose if you won even the smallest prize of 50 euro just once a year, you'd be no worse off than if you'd placed it on deposit (with an outside outside chance of winning something bigger). If...
 
Messages
4,885
Prize Bonds being tax free are starting to look attractive again but you'd have to be buying 4k worth to have a decent chance of a prize
You need to factor in odds as a comparable factor to deposit interest. Odds are not specially driven by the 'average' rate of return that the NTMA pay on State Savings Prize Bond prizes because very few people get the 'average'.

€1,000,000 is given to 1 person 6 times a year. With 6 million (the last figure I can find) of Prize Bonds in circulation, the changes of you winning this in per year are approx. 1 in 1 million. Hence, you have a 0.00001% chance of winning this per year.

€20,000 is given to 1 person 52 times a year. With 6 million (the last figure I can find) of Prize Bonds in circulation, the changes of you winning this in one year are approx. 1 in 115,384.

There are small prizes of 50 EUR to 1,000 EUR. You would need to use countless variables to work out the real probability, suffice to say that it is low, very low, of getting any meaningful return.

The 'average' person gets far less than 1.75%.

Marc did a great post on this a while ago, the post is very dated, with old rates of return, but the principle remains the same.
 

Brendan Burgess

Founder
Messages
41,035
You would need to use countless variables to work out the real probability, suffice to say that it is low, very low, of getting any meaningful return.
Hi Ciarán

But there is no meaningful net return on ordinary deposits either.

If the choice is between

a) A deposit paying 5%
and
b) A Prize Bond with an average return of 5%, but a 99% chance of 0 and a 1% chance of 500%

I would choose a)

But if it's between
a) a net reurn of 1.5%
and
b) An average of 1.75% with a 99% chance of 0

I just might go for b)

Brendan
 

Marc

Frequent Poster
Messages
1,099
Ciaran,

I have worked out some rough numbers based on the latest data on the website.

At the end of April this year according to prizebonds.ie the total amount in prize bonds was 1.7 Billion and the "interest rate" is 1.75%

1.7 billion times 1.75% = 29,750,000 in prizes.

Remove the 1m jackpots (every 6 months) that you probably won't win from the prize fund

= 29,750,000 - 6,000,000 = 23,750,000 realistic prize fund

Divide that back into the bond pool of 1.7 billion and you get 1.397%

So a more meaningful "interest rate" for prize bonds is 1.4%

Now build in a risk factor which is that some months you will "win" less than this "average" in fact for some people they may win nothing at all. Of course someone has to win the jackpot.

So just how likely is this? There are 280 million bonds in issue so every other month each bond you own has a 1 in 280 million chance of winning a million.

The problem with grasping the smallness of "1 in 280 million" is that we never see 280 million objects. I am one of 4 children in my family - easy. But one in 280 million cannot be readily visualized.

Have a guess how many years 280 million seconds is..........answer at the bottom

We therefore tend to overestimate the likelihood that we could win the jackpot and this is compounded by the fact that every other month someone actually does win.

We also know that people prefer impossibly small chances of winning but hate any chance of losing. Hey, your original stake is safe and you can have it back anytime ( less inflation and the opportunity cost of the lost interest you could have made if you had done something sensible)

If you buy more than one bond in the hope of improving your chances of winning the jackpot , you really just expose more of your savings to the risk of earning less than the average 1.4%pa. Until you are able to hold every single bond in existence for an infinite period at which point your prize is exactly the 1.75% interest rate.

The only body capable of pulling off that feat is NTMA who win the prize of borrowing your savings at an interest rate of just 1.75% rather than much higher rate in the bond market.

280 million seconds is 8.872 years. Just say tick tock to yourself, now imagine that for nearly 9 years .
You have to randomly select just one of those seconds over that whole period.

Pick any date in the future: On wednesday 20th December 2017 at 10.45 in the morning and 26 seconds or is it 27 seconds?
 
  • Like
Reactions: zen
Messages
4,885
Great post Marc, great probability analysis and analysis of the human psychology that goes with lottery playing against insurmountable odds.

A 1 in 280 million chance of getting the top prize (and there are not many small prizes anymore) needs to be factored into anyones decision when choosing between deposit products and Prize Bonds.

Brendan, whilst I see where you are coming from, I think the probability of a zero return via Prize Bonds is far too high to justify choosing Prize Bonds over deposit products or other investment products.
 

Brendan Burgess

Founder
Messages
41,035
Hi Marc

You are working out the chances for someone with €1 invested for exactly one year.

I think you should work out what the Expected Return is for someone who has €100,000 invested.

And most people don't invest for one year. They leave their deposits there for the long term. So I would imagine that their return would average out at the 1.397% return you have calculated.

borrowing your savings at an interest rate of just 1.75% rather than much higher rate in the bond market.
For someone who is putting there money away in three year NTMA Bonds at 1.3%, it's roughly the same return, but with access to their money.

Just to be clear - I think that people should hold a diversified portfolio of shares and not be bothering with deposits of any sort. But for people who are invested in deposits, Prize Bonds are now relatively attractive.
 

dub_nerd

Frequent Poster
Messages
1,969
I think you should work out what the Expected Return is for someone who has €100,000 invested.
Hi Brendan, with the changes in interest rates and hikes in DIRT and PRSI, I'm considering putting a considerable chunk in prize bonds. I did some calculations on likely returns and thought I would share them here. Although, as Marc has said, an exact calculation of the odds of a given return is complex, it is easy to simplify roughly to within any given confidence level. (The likely returns are a little less than what Marc calculated). The main thing for people to bear in mind is that for a small investment, your chances of an average return are negligible, and Prize Bonds are not a good idea in this case. If you want to treat Prize Bonds as an investment and want to have an excellent chance of "average" returns (which I will define below), you would want an absolute minimum of €10k investment, but preferably several times that. I will do a calculation for €100k but I will also talk about the implications for smaller and larger amounts.

Summary.

The prize fund is split between a small number of large prizes which you have essentially no chance of winning, and a large number of small prizes which -- if you invest enough -- you can reasonably rely on an average return from.

Your chances of achieving an average return increase with the amount of money you invest. Note that your return may be more or less than the average no matter how much you invest, but the chance of getting near the average are better for higher amounts and longer periods of investment.

For an investment of €10k to 100k you will probably achieve about 1.18% (equivalent to 2.1% from a bank account assuming 41% DIRT + 4% PRSI). For an investment of 100k+ you may achieve 1.33% (equivalent to 2.4% assuming DIRT and PRSI). Note that these are all probabilistic values with reasonable confidence levels. If you want the excruciating detail, read on.

How the prizes are structured.

The total prize fund is currently calculated at 1.75% of the value of total Prize Bonds held. Latest figures are as of April 2013 and can be viewed on the State Savings web page. Since the total value is currently €1.7b (made up of 280m individual Prize Bonds), this gives a total annual prize fund of €29.75m, structured as follows:

€1,000,000 x 6 times annually = €6,000,000
€20,000 x 46 times annually = €920,000
€1,000 x 5 times weekly = €260,000
€100 x 500 weekly = €2,600,000
Total annual value: €9,780,000

Now, ironically, the above details can be almost ignored, since you won't be winning any of that. Almost all of your returns will come from the €50 prizes which make up the remainder of the prize fund. The only reason for the above calculation is to subtract the money you won't win (€9.78m) from the total prize fund (€29.75m) to give the total value of €50 prizes: €19.97m. This works out at 399,400 x €50 prizes per year.

What are your personal odds?

It would be messy to calculate odds based on number of prize bonds held. It's easier to calculate your fraction of the total prize bonds by dividing your investment into the total monetary value of all bonds. For a holding of €100,000 you have €100k/€1.7b = 1/17,000 of all bonds. This is very important! On average you will win one prize out of every 17,000 prizes. (If you invested €10,000 this would change to one prize in 170,000; if you invested €1m it would be one prize in 1,700).

How much will you win?

Unfortunately, few people have an intuitive feel for odds and risk. Think about those €1,000 prizes, 5 times weekly. There are 260 per year. With your investment of €100k you will win one on average every 17,000 / 260 = 65 years. Do you want to bet on a return that might come in every 65 years (or might not)? Clearly not. There's a good chance you won't collect on it in your lifetime. Still, it's worth thinking about this in terms of confidence levels. These are a little complicated to work out so I won't go into details, but will just state that: you have a 50% chance of winning that €1,000 prize within 45 years. If you want a 90% level of confidence, you will have to wait 150 years. And to have a 99% chance of winning, you will wait 300 years!

Now, I'd be prepared to treat a 99% chance of winning as a fairly sure bet, although I'd still want to think about the consequences of the 1% chance that I wouldn't win, to see if I'm prepared to take that risk. But it's all academic in this case because I'm not prepared to wait 300 years to be 99% sure of a return! The point to illustrate here is that the average time for a return -- 65 years -- is by no means a guarantee that after 65 years you will have won once. You might never win, or it might take a million years! But there's a 99% chance you'll have won (at least once) after 300 years.

Hopefully it's obvious that there's no point even thinking of winning any of the big Prize Bond prizes, unless you are a gambler rather than an investor. On the other hand, look at the number of €50 prizes annually -- 399,400. With your €100k investment you stand to win 399,400 / 17,000 = 23.5 per year on average, or nearly one per fortnight. Just as importantly, we want to know what the confidence level is that you will achieve this average or close to it. Here we have to use some horrible statistical methods again (the binomial distribution, for anyone who wants to check it out), so I will just state the result: there is about a two thirds chance that you will win the €50 prize between 20 and 28 times annually, and a 92% chance you will win it between 16 and 32 times. The long and short of this is that "your mileage may vary" but there is a good chance you will get close enough to the average. Remember: this is based on a 100k investment. The odds of you getting close to the average diminish with a smaller investment. This does not mean you will win a smaller percentage -- you could win more! But the odds get "lumpier" the less you invest. (If you don't understand this, this investment may not be for you).

So what is the average return? It is 23.5 x €50 / €100k = 1.175%. But don't forget the confidence levels -- they tell us that there is a 92% chance that your actual return will be between 0.8% and 1.6% for an investment of €100k within a given year. The average return doesn't change no matter what you invest. But the confidence level of getting close to the average is higher for a higher investment. For a €10k investment there is much less chance that things will average out in any given year, due to the lumpiness problem. To illustrate, remember that with €10k invested you will win on average 2.35 x €50 / €10k = 1.175%. Still the same average return, but you can only win an integer number of prizes. Here are two graphs for €10k and €100k showing the percentage probability of each number of €50 wins:



The difference in lumpiness should be obvious. For €10k you will win 2.35 times on average, but there's a hefty 9% chance you'll win nothing at all in a given year, and only a 70% total chance that you'll win 1 to 3 times. Things are much smoother with the €100k -- you could still win nothing but the chances are tiny: much less than one in a billion! The chances are less than one in a hundred that you will win less than 14 times (or more than 35 times).

So, an average return of 1.175% would be the final answer except that between the €1000 (and upward) prizes that you will never win, and the €50 prize that you will win fairly regularly, there is also the €100 prize. Now, there are 15 times fewer of these, so you can only expect to win 1.53 of them every year. When we factor these in the average return goes up to 1.33%.

But -- and this is a big but -- the low average number of €100 wins also gives a much lower confidence level that you will achieve close to the average... that lumpiness factor again. If you only invest €10k, you will probably wait many years before winning a €100 prize, so you should use the lower average return of 1.175% unless your investment is over a timescale of decades. If you invest €1m you are much more likely to quickly average the higher return of 1.33% even over a timescale of a single year. For a €100k investment, you are somewhere in the middle. It might be prudent to bank on 1.175%. But if you leave your money invested for a few years, you are more likely to achieve the higher return of 1.33%.

Remember, this is all statistical. You are not guaranteed anything. However, for large amounts of money and time, the chances of an average return are good.

EDIT - returns may be higher!

The numbers I used here are based on the Prize Bond FAQ which gives a total value of outstanding Prize Bonds of €1.7b as of April, and an implied number of €50 prizes of 399,400 per year, or 7,680 per week. However, the front page of the Prize Bonds website states that there are now over 8,000 €50 prizes per week. And the results for the latest draw (currently 15-Nov-2013) show 9,346 prizes in that week. Subtracting the 506 prizes greater than €50, that leaves 8,840 €50 prizes. Now, amtc mentions down page that people use Prize Bonds to accumulate money due for tax. This implies that the number of bonds may reset around end of year. But the 2012 Prize Bonds annual report says that the value of the fund went up 14% from 2011 to 2012. An increase in fund value doesn't directly change your likely return because your share of the fund, and thus your chances of winning a fraction of a bigger pot, go down accordingly. However, with increasing value, the number of large prizes (which eat up a third of the potential returns) goes down as a fraction of the overall prize fund, leaving more of the small prizes from which your returns primarily come. Basically, as long as the prize structure stays the same, increases in fund value favour investors over gamblers.

EDIT: add graphs
EDIT2: update with finer grained graphs.
EDIT3: add caveat about increase in outstanding bonds.
EDIT4: update with more accurate graph and numbers based on using Stirling's formula
 

The Ghoul

Frequent Poster
Messages
346
Good post, dub nerd. I put 100k into PBs six weeks ago thinking along the same lines as yourself. No point investing a small amount and no point even thinking about the jackpot prizes.

My wins so far are
Week 1: 1 x 50
Week 2: nothing
Week 3: nothing
Week 4: 2 x 50
Week 5: 1 x 50
Week 6: 1 x 50

Pleased with that so far and if it continues for a year the return will be just over 2% net, higher than I'd get with a one year fixed term deposit.

I confess to getting quite excited at 12:30 every Friday logging onto prizebonds.ie and knowing that there is a good chance that I'll win 50 quid.

Also, I put my winning cheques into ten year Solidarity Bonds so I'm compounding my returns. Handy that the minimum amount for SBs is 50 euro.
 

ronaldo

Frequent Poster
Messages
399
I love the use of seconds to illustrate to people how big a certain number is. I saw it recently in posts talking about how people talk about billions of euros without realising exactly how big a number it is - a billion seconds is 31 years, 259 days, 1 hour, 46 minutes and 40 seconds. :O
 

amtc

Frequent Poster
Messages
714
I was always amazed by the high rate of redemptions of Prize Bonds until someone (in that office) told me that it was a place that self employed put in cash before paying tax the next year
 

Marc

Frequent Poster
Messages
1,099
Great post by Dub nerd, certainly one of the most useful and informed posts on AAM.
 

postman pat

Frequent Poster
Messages
332
Good post, dub nerd. I put 100k into PBs six weeks ago thinking along the same lines as yourself. No point investing a small amount and no point even thinking about the jackpot prizes.

My wins so far are
Week 1: 1 x 50
Week 2: nothing
Week 3: nothing
Week 4: 2 x 50
Week 5: 1 x 50
Week 6: 1 x 50

Pleased with that so far and if it continues for a year the return will be just over 2% net, higher than I'd get with a one year fixed term deposit.

I confess to getting quite excited at 12:30 every Friday logging onto prizebonds.ie and knowing that there is a good chance that I'll win 50 quid.

Also, I put my winning cheques into ten year Solidarity Bonds so I'm compounding my returns. Handy that the minimum amount for SBs is 50 euro.
Great post also.... it gives actual returns and i can identify with the feeling of excitement on a Friday checking your numbers,,, to steal a quote from an advert ... PRICELESS
anyway i invested last week, a tidy sum also, will let u know how i get on.

Pat
 

dub_nerd

Frequent Poster
Messages
1,969
+1, The_Ghoul ... great to see some real numbers. Your result of five wins in six weeks is well ahead of what I would have expected. The same performance for the year would give you 43 wins compared to an average 23. Unfortunately, I calculate the a priori odds of that to be well under one in ten thousand, so I'm going to predict that your performance levels off somewhat.

On the other hand, my numbers could be wrong. MS Excel can't come close to calculating totally accurate odds for such a vast number of possibilities (...try calculating factorial 399,400!), but I would expect my approximations are very close.

Would be good if you and postman_pat gave us an update a couple of times yearly. I'll do likewise if I take the plunge.
 

postman pat

Frequent Poster
Messages
332
Would be good if you and postman_pat gave us an update a couple of times yearly. I'll do likewise if I take the plunge.


Will do..anyway got my numbers in post today,checked them...guess what!!..won €50
:)
 

elcato

Moderator
Messages
3,456
Not to take this off-topic but how would one 'invest' in one handy lump sum 10k or 100k (in prizebonds) and how handy is it to get it back very quickly ?
And does a bank accept the receipt as 'savings' ?
 

dub_nerd

Frequent Poster
Messages
1,969
I haven't done it, but I've done other State Savings and I presume it's the same. Go to the post office with an application form and a cheque, and proof of name, address and PPSN. You have to hold prize bonds for a minimum of three months, but after that you can get them on demand. I'd imagine it would take them a couple of days to cut you a cheque.
 

RainyDay

Frequent Poster
Messages
4,506
God be with the days when Amex Blue would give you 1% cashback on the Prize Bonds, along with six or seven weeks free credit if you timed it right!
 

TomOC

Frequent Poster
Messages
186
Are all winnings posted out by cheque?

Good post, dub nerd. I put 100k into PBs six weeks ago thinking along the same lines as yourself. No point investing a small amount and no point even thinking about the jackpot prizes.

My wins so far are
Week 1: 1 x 50
Week 2: nothing
Week 3: nothing
Week 4: 2 x 50
Week 5: 1 x 50
Week 6: 1 x 50

Pleased with that so far and if it continues for a year the return will be just over 2% net, higher than I'd get with a one year fixed term deposit.

I confess to getting quite excited at 12:30 every Friday logging onto prizebonds.ie and knowing that there is a good chance that I'll win 50 quid.

Also, I put my winning cheques into ten year Solidarity Bonds so I'm compounding my returns. Handy that the minimum amount for SBs is 50 euro.
 
Top