Swedish Lottery Bonds Harvard Case Solution & Analysis

Swedish Lottery Bonds Case  Solution


Swedish lottery bonds were first issued by Sweden and became active in a very short time period that is from 1970 to 1990. The Swedish lottery bonds provide interest rate return, which is known as lottery; the lottery bonds are government debt. The return on lottery bonds is a fixed commitment amount that does not affect changes in the economy. The return is uncertain, and it consists of some risks that can be easily diversified.

The Swedish National Debt Office (SNDO) offers the lottery bonds and the office issues traditional bonds such as government bonds, and treasury bills. Basically, the Swedish bonds are fixed income to the investors that have different features as compared to the other traditional bonds. Lottery bonds also shows the tax effect, if the investor buys the lottery bonds from the capital gain and the time of selling the market price is low, then the loss would be covered by tax-free lottery bonds. Most of the times, the investment on lottery bonds is risk averse. Moreover, the investors prefer to invest in lottery bonds due to the tax benefits.

The objective of the case is to define the various features of bonds and the risk associated with other traditional bonds compared to the lottery bonds and the decision to issue lottery bonds in the market or use of any other alternative. In addition, to provide the long-term investing decision that provides benefits to issue the lottery bonds from the Debt office perspective that attract the retail investors to take part actively in the auctions of government bonds.

1.      Draw a time line to illustrate the payoffs on a lottery bond for an investor.

The diagram shows the timeline of payoffs at different maturities depending on the coupon rate payment and the total trading volume of lottery bonds. As seen in the diagram, the company has to arrange more funds between November 2007 and December 2008 because most of the bonds have the maturity and to pay the high amount of payoffs along with the principal amount.

2. Explain the features of the bond and the sources of risk relative to a traditional coupon bond:

The main feature set by the government of Sweden is that the borrowing of the lottery bonds from the retail market at the lower cost than any other institutional or traditional market. There are some features associated with the lottery bonds:

The main feature it provides ex-day return just because of tax shield, which shows that the capital investor bears the loss in its first quarter, which it recovers in the third or fourth quarter due to the tax shelter that increases the return at the end of the year. It is sometimes called the turn of year effect for small capital stocks.

Each bond issue has a series of numbers and order numbers through which they are issued. Moreover, these bonds can be reissued through changing their terms and conditions along with maturity. The dual structure leads to increase the chances for generating and distributing the winning bond lottery based on its coupon payment with sires and order numbers..................

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