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Lottery Bond

Category — Bond Types
Lottery Bond is a debt instrument that gives its holder the right to receive the par value, a fixed or zero-coupon from the issuer, and the opportunity to win a lottery. That is, in fact, an investment consisting of a coupon or zero-coupon bond and a lottery ticket.

The main characteristics inherent in this type of bonds:

• More extended investment period;

• Lower yield - in the case of lottery bonds, it is not entirely correct to use the concept of yield on an issue; here, we are talking about a specific average yield of an issue, and even more often about a median yield, which is usually equal to zero;

• Small par value - this is since the target audience of lottery bonds are common people;

• The issuer in the overwhelming majority of cases is the federal, less often municipal, government. However, there are cases when the issuers of lottery bonds were corporations - for example, the Panama Canal Company and the Suez Canal Company, which issued lottery bonds in the 19th century.

Why Do Issuers Resort to Issuing Lottery Bonds?

1. Historically, the primary purpose of issuing such bonds has been the financing, namely, the cheap one. Initially, lottery bonds were a permanent instrument for replenishing the state treasury.

In the 19th and 20th centuries, they began to be used as a tool for attracting capital in exceptional cases. A good example is the issues of the already mentioned companies of the Panama and Suez Canals, which needed funds from the broadest possible circle of investors to implement their colossal projects. There have also been issues from various other governments. For example, in 1921, the German government resorted to issuing lottery bonds to raise the necessary funds for the payment of war reparations to Great Britain. The Soviet Union did the same in the period from 1942 to 1945 to finance military actions.

2. Since the second half of the 20th century, the governments of different countries issued lottery bonds to stimulate savings among the population as the main goal. The most striking example in this direction is the Premium Bonds of Great Britain, first issued in 1956.

Why Are Lottery Bonds Attractive to Investors?

1. Probably, first of all, it is the possibility of obtaining colossal profitability, with zero (or rather “near-zero,” since all governments have a particular risk of non-repayment of debt) probability of losing the invested funds. What can be the winnings? For example, the maximum possible prize for Premium Bonds at the time of February 2021 is equal to £1 million, which, according to the data, is received by two holders every month. The probability of winning this amount is 1 in 51,063,525,579. Not just money can be used as a prize. So, for example, at the end of 2019, the Philippines’ Government, raffled premium apartments in addition to cash as a prize for lottery bonds.

2. For the population of developed countries, lottery bonds are a fairly popular option for protection of savings, despite the lack of investment protection from inflation.

3. In the 20th century, lottery bonds were often used by investors as a tax arbitrage instrument. Thus, in the 70s and 80s of the last century, a scheme was popular in Sweden. Lottery bonds were bought before the coupon drawing and sold immediately after a loss fixation, which reduced the taxable base. The tax savings offset the loss on the bond deal. The strategy became obsolete after Sweden’s tax reform in 1991.
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