Premium bond

Definition

A premium bond is a bond that is trading above its face value. This occurs when the bond's coupon rate is higher than prevailing interest rates.

5 Must Know Facts For Your Next Test

1. Premium bonds yield less than their coupon rate because they are bought at a price higher than face value.
2. Investors may buy premium bonds to receive higher periodic interest payments compared to current market rates.
3. The price of a premium bond decreases as it approaches its maturity date, converging towards its face value.
4. When calculating yield to maturity (YTM) for a premium bond, the YTM will be lower than the coupon rate due to the higher purchase price.
5. Accounting for amortization of the premium over time is necessary when assessing investment returns on premium bonds.

Review Questions

• Why would an investor consider purchasing a premium bond?
• How does the yield to maturity of a premium bond compare to its coupon rate?
• What happens to the price of a premium bond as it nears maturity?

Related terms

Face Value:

The nominal or par value of a bond that is paid back at maturity.

Coupon Rate:

The annual interest rate paid by the issuer of a bond based on its face value.

Yield to Maturity (YTM):

The total return anticipated on a bond if it is held until it matures, accounting for its current market price, coupon interest payments, and face value at maturity.