Premium Bonds: Are they worth it? Discussion Area

ReportInvestor

Pablo1971 wrote:

Lord Sugar. LOL, now that would be funny!

It's inevitable whether you find it funny or not.

Invaluable service to the Treasury is unlikely to be ignored.

Pablo1971

ReportInvestor wrote:

It's inevitable whether you find it funny or not.

Invaluable service to the Treasury is unlikely to be ignored.

True. The evidence is laid bare before our very eyes!

cheerfulcat

Gorgeous_George wrote:

Thanks.

How did it work before the changes?



GG

Hi, GG,

NS&I products were meant to be, as RI said, " the people's " savings vehicle. Until GB got hold of them it worked pretty well, and the rates were pretty competetive.

I suspect that the fact that since 1999 a large part has been outsourced to Siemens under PPP hasn't helped either...

stevemcol

Wambamboo and Reestit Mutton

You are both clearly correct in mathematical and statistical analysis. BUT your analysis is valid for the entire investment base. However, advice to the individual must be to discount the higher prizes as you will not win them. I emphasise this point because probabilities smaller than 10E -6 or -7 can effectively be considered so small as to be neglible. (For an individual!)

Reestit_Mutton

stevemcol wrote:

Wambamboo and Reestit Mutton

You are both clearly correct in mathematical and statistical analysis. BUT your analysis is valid for the entire investment base. However, advice to the individual must be to discount the higher prizes as you will not win them. I emphasise this point because probabilities smaller than 10E -6 or -7 can effectively be considered so small as to be neglible. (For an individual!)

Stevemcol,

The problem with your analysis is that ANY individual prize can also be ignored for exactly the same reason as each individual prize has exactly the same probability (it's just that there are many thousands of individual £50 prizes which add up to a slightly more significant probability of winning at least one of them). So why choose to ignore just the big prizes?

If you are going to apply engineering logic, then it must be applied across the board, not just in selected cases.

Alas, doing so in this instance results in the ridiculous outcome of zero prize money....thus it was never a good approximation to make in the first place.

BTW, your negligible probability argument is exactly analogous to someone saying that a particular outcome in a continuous probability distribution can be ignored because it will never happen - the problem is that ALL outcomes have zero probability in the continuous case. This is because probability is measured by area under the curved and a line (the graphical representation of any fixed outcome) has zero area. This may sound crazy, but it's mathematically provable.

Reestit Mutton

stevemcol

Reestit

I'm neither correct nor incorrect because I haven't applied any analysis to the bigger picture. The only party really interested in the bigger picture is NS and I.

The following statement is correct: There is a reasonable chance of an individual winning £50 (there are many £50 prizes therefore many chances of a hit)

The following statement is correct: There is little chance of winning £1,000,000. There are only two £million prizes per draw and therefore negligible chance of a hit.

It is therefore reasonable, if viewing pre bonds as an investment, to ignore the larger prizes.

However, if an individual is looking for a relatively risk free flutter, then go for it.

Can I re-state that I know you are mathemtically correct but you are missing the point of Martin's advice.

Reestit_Mutton

stevemcol wrote:

Reestit

I'm neither correct nor incorrect because I haven't applied any analysis to the bigger picture. The only party really interested in the bigger picture is NS and I.

The following statement is correct: There is a reasonable chance of an individual winning £50 (there are many £50 prizes therefore many chances of a hit)

The following statement is correct: There is little chance of winning £1,000,000. There are only two £million prizes per draw and therefore negligible chance of a hit.

It is therefore reasonable, if viewing pre bonds as an investment, to ignore the larger prizes.

However, if an individual is looking for a relatively risk free flutter, then go for it.

Can I re-state that I know you are mathemtically correct but you are missing the point of Martin's advice.

Nope...I got Martin's advice loud and clear and, for the record, stated early on that I agreed with his basic viewpoint.

All I am trying to say, and have been trying to say all along, is that it didn't need to be amplified by the inappropriate use of statistics.

Here are a couple more factually correct statements:

(1) The prizes range from £50 right up to £1M.
(2) There is a reasonable chance of an individual winning one of these prizes.

We can all use semantics to construct a supporting argument if we want to. However, mathematics (when used correctly) cannot deceive.

regards,
Reestit Mutton

Gorgeous_George

As an investment guide for an individual, Martin's figures are spot on. There will be more people earning less than 3.15% than more than 3.15%.



GG

ashm1

http://www.fsa.gov.uk/consumer/09_SAVINGS/your_rights/mn_ns_your_rights.html

The closer your holding is to the minimum £100 the more likely it is that you will receive zero interest. In effect you are giving your interest away to those holding £30,000 (probably higher rate tax payers) and the government. Is this correct ?

Kind regards,

Ashley

Milarky

ashm1 wrote:

http://www.fsa.gov.uk/consumer/09_SAVINGS/your_rights/mn_ns_your_rights.html

The closer your holding is to the minimum £100 the more likely it is that you will receive zero interest. In effect you are giving your interest away to those holding £30,000 (probably higher rate tax payers) and the government. Is this correct ?

Kind regards,

Ashley

Yes and no. With £100 unless you win a prize (of £50+) in a year you will 'give' the gov't £3.15 compared to the interest you could earn from the fund (say '£4' - assuming a top-paying account elsewhere that pays 5% and you are a basic taxpayer) So that's a 'loss' of £4...

Now if you hold the maximum £30,000 in Bonds you are (on Martin's analysis) highly likely to win several prizes of £50+ - in fact you should win 15 prizes on average at odds of 24000:1 - but still highly unlikely to win any prizes above £100. So he has assumed that such large Bondholders (i.e. most of them but not all) will still only collect about 2.75% (£825). But you can't win exactly '£825' either, so its better to state 'either £800' or '£850'. But even the higher figure is just 2.83%

Now 3.15% - 2.83% is the amount 'lost' (compared to the average) if you accept this approach. So that means '-£95'

Thus although a 'typical' £100 bondholder is 'most likey' to go through a year foregoing about £4 interest, a 'typical' £30K bondholder is giving up £95 'on average' to the prize fund. Whilst they win something they lose still more to 'the average' than the small holder does. And they 'lose' even more if they are also BR taxpayers and could have got £1200 in interest (at 4% net) because that would be at least £350 more than the 'average' (i.e. 'median') large bondholder.

[see my comment here on the related threat discussing Lottery 'stategies']