The name's Bond. Premium Bond.

Just saw some interesting research on premium bonds. If you're not familiar with these, they are a type of Government bond (ie, by buying them, you are lending money to the British Government), which means a pretty safe investment: a lot would have to go wrong before the Government couldn't give you your money back. Another benefit is that the interest paid on them is tax-free.

So far, so boring: the law of risk and return, which states that the lower the risk, the lower the return, would mean a pretty low rate of interest on these, given how low-risk they are. And that would normally be the case.

However, in an effort to spice up the returns on these, the Government decided to borrow some tactics from that other great fund-raising idea, the National Lottery. So instead of paying out the interest on the bonds in the normal way, the interest on the whole fund is gathered together, and paid out as prizes to the bondholder. There are two prizes of £1 million, and a host of smaller prizes, distributed each month.

So simply by buying a few bonds, you could become an instant millionaire! And you still get your money back whenever you want it! A lot better than the Lotto, no?

Well, yes, but that's not saying much. The Lotto is an absolute and complete waste of time and money for almost everyone who plays it. And the chances of being one of the winners is so small it's almost zero. You should certainly never look at the Lotto as an investment possibility.

So we should compare Premium Bonds to other investments. And here, we can see that the same blind hope that causes people to waste money on the Lotto each week, serves to hide the fact that Premium Bonds are a very poor investment.

Not only is the interest rate pretty measly (3.8%), but the payout structure means that most bondholders don't even get that. Martin Lewis has an excellent explanation of why this should be, over at his Moneysavingexpert site.

The moral? Always do the maths, look at the bottom line, don't be dazzled by what "might happen". Look at what probably will happen. And in this case, while you hope to win a million, the reality is that in most scenarios, you will lend the money to the Government for nothing. Don't do it!