PREMIUM BOND

Summary

A premium bond is a bond that sells for more than its face value (par value) in the secondary market. This typically occurs when the bond's coupon rate is higher than current market interest rates, making it more attractive to investors. For example, if a bond has a face value of $1,000 but trades at $1,050, it's trading at a premium of $50. The premium reflects the present value of the bond's above-market interest payments.

Usage Context

Understanding premium bonds is crucial when studying bond valuation, interest rate risk, investment decision-making, and portfolio management. This concept is fundamental in fixed-income securities analysis and helps explain the inverse relationship between bond prices and interest rates.

Common Confusions

• Thinking premium bonds are always better investments than discount bonds
• Confusing premium with the bond's yield or return
• Not understanding that the premium amortizes over time
• Believing you get the premium back at maturity (you only get face value)
• Mixing up premium bonds with preferred stock or insurance premiums