Lottery Bond

DEFINITION of 'Lottery Bond'

1. A type of government bond issued in the United Kingdom by National Savings and Investment (NS&I) that gives the holder a chance to win a random monthly drawing for a tax-free cash prize. The bonds don't pay interest but they do encourage saving. However, because they don't pay interest, they are not protected against inflation.

Otherwise, these are considered extremely safe because they are backed by the U.K. government. The bonds can be purchased directly from NS&I or from the post office. Each bond is worth £1 and there is a £100 minimum investment.

2. A type of commercial surety bond that establishments with lottery machines must purchase to prevent abuse of the state lottery system.

BREAKING DOWN 'Lottery Bond'

Officially called Premium Bonds, the U.K.'s lottery bonds were introduced in 1956 with the goal of reducing inflation and attracting people who were otherwise not interested in saving. In 2008, £40 billion was invested in Premium Bonds, one of the country's most popular savings vehicles. A machine called ERNIE randomly generates the winning bond numbers. The amount of the prize fund is a month's interest on all eligible bonds, and multiple winners are paid prizes of varying amounts from that fund.