Premium bond
Premium bond is a bond which prices and interest rates are inversely related; that is, they tend to move in the opposite direction from one another. A fixed-rate bond will sell at par when its coupon interest rate is equal to the going rate of interest, rd. When the going rate of interest is above the coupon rate, a fixed-rate bond will sell at a “discount” below its par value. If current interest rates are below the coupon rate, a fixed-rate bond will sell at a “premium” above its par value.
Definitions
According to Financial Management Theory and Practice by Eugene F. Brigham and Michael C. Ehrhardt (13th edition),
- Premium bond. Bond prices and interest rates are inversely related; that is, they tend to move in the opposite direction from one another. A fixed-rate bond will sell at par when its coupon interest rate is equal to the going rate of interest, rd. When the going rate of interest is above the coupon rate, a fixed-rate bond will sell at a “discount” below its par value. If current interest rates are below the coupon rate, a fixed-rate bond will sell at a “premium” above its par value.
According to Fundamentals of Financial Management by Eugene F. Brigham and Joel F. Houston (15th edition),
- Premium bond. A bond that sells above its par value; occurs whenever the going rate of interest is below the coupon rate.
Related concepts
- Financial management. A combination of enterprise efforts undertaken in order to procure and utilize monetary resources of the enterprise.
