Lottery bonds are a type of bond that is issued in the United Kingdom, the United States, and many of the territories and other holdings of those two nations. A distinguishing characteristic of this type of bond issue is that the amount of return from a given bond is predicated on the outcome of a lottery rather than on the performance of an underlying asset. While the potential return is generally more than on more conventional bonds, there is also the possibility that a given bond holder will never actually realize any return on the investment.
While methods of administering a lottery bond may vary slightly, most involve investors choosing to purchase a bond for a specific amount of money. On a monthly basis, drawings are held to determine which bondholders will receive some type of return, and how much that return will actually be. In a sense, this makes the lottery bond somewhat like a lottery ticket, in that there are no guarantees of earning any type of return. Unlike a lottery ticket, government bonds of this type do allow the holders to try again the following month and possibly earn some type of return at that point.
In order to provide incentive for purchasing a lottery bond, the potential return is typically more than would be generated with municipal or corporation bonds. This means the coupon payments on a lottery bond would amount to more than the coupons on other types of bond issues. For those who can afford to invest in this kind of bond and allow the investment to ride for a number of months, the strategy can eventually pay off, often in no more time than it would take for a conventional bond issue to mature.
Along with the somewhat higher risk of not earning a return at all, there is also the possibility of investors being defrauded by scam artists who attempt to sell purported lottery bonds that are in fact not authorized for participation in the lottery. For this reason, it is important to determine that the bond is in fact issued by a corporation that is permitted by the government to offer lottery bond issues to investors. Proof of authorization is willingly provided by licensed corporations, while online resources also make it possible to determine if a given firm has the ability to issue a lottery or premium bond associated with the monthly drawing.
