PREMIUM BONDS.

Taranaki Herald, Volume LXVII, Issue 16501, 31 July 1919, Page 3

PREMIUM BONDS.

PRINCIPLE EXPLAINED. (Melbourne Argus*) It was recently announced that the Paris municipality had issued a new premium bond loan lor £60,(X)0,000, bearing interest at 5 per cent., the issue price of each bond being 480 (at nominal nu\o of exchange about £i< 4s), redeemable at par 500 francs (£2O). "With similar issues already in circulation of the same municipality and other public activities, including I the French Credit Fonder, the total ' amount borrowed from small investors ; in France by means of premium bonds ! still in circulation is over £400,000,000. ! The difference between ordinary loan | issues and premium bonds is that while I under the former system money is borrowed for a certain number of years, and has to he repaid at the due date, either in currency or by means of conversion, premium bonds arc redeemed by means of annual drawings ox tending over a given period. At certain stated periods in each year until the entire loan is redeemed drawings take place ol a given number of bonds. The majority aro drawn at par—that is to say, they aro redeemed at the face value, which in tho case cited of the recent Paris municipality issue is 500 [ francs or £2O. To certain numbers of ! the bonds drawn premiums are attached. and it is this that constitutes the attraction to small investors. Interest is paid at a slightly lower rate than for ordinary public borrowing, the difference between tho ordinary rate and the rate actually paid being devoted to a sinking fund to provide for tho premiums or prizes on the lucky numbers coming out al each drawing. The investor is content with a slightly decreased rate of interest, but has tho chance at a certain number of times each year of winning a substantial prize. Eventually his original investment must bo redeemed (even if no prize bo won) at a little over the- original cost. In no case can the sinking fund ho devoted to any other purpose than to make provision for the drawings, neither can payments into the sinking fund be Suspended for any reason. An example of how the system works may bo taken from the loan of £20.000,000 issued by the French Credit Fonder in 1912, bearing interest at 3 per cent., and with a currency of 70 years. The face or par value of the bonds was £lO, and drawings are held periodically as follows: One bond of £lO, with premium of £4OOO. One bond of £lO, with premium of £4OO. Twelve bonds of £lO, with premium each of £4O. One hundred bonds of £lO, with premium each of £lO. A large number of bonds at par. In 1917 another loan was issued by the credit fonder for £24,000,000 at a much higher rate of interest. This time 5) per cent, had to bo paid, and the premiums or prizes were Jixed at £IOO,OOO a year, the highest pfemium being £20,000. So successfully did the issue appeal to the small investor that the applications amounted to £160,000,000. The new City of Paris loan bears interest at 5 per cent, (J per. cent. lower than the Credit Fonder loan of 1917). There are to he six drawings each year, with premiums amounting in all to £240,000 each year. One bond is to be drawn during the year at £40,000, and five each at £BOOO, while the .remaining premiums resulting from each drawing are fixed at proportionately high values. The issues are an investment and not a “gamble.” The only element of chance is in connection with the distribution of the difference in interest paid to investors and the standard rates which money _ would command. This difference constitutes the sinking fund from which the premiums are provided. Each bond shares equally in the chances of the drawings. There is hardly a concierge or working man or working girl in France who has not a premium bond carefully hidden away. The avidity with which every new issue is subscribed for furnishes convincing evidence that premium bonds constitute a great inducement to thrift among tho working community.