What does it mean when a bond is selling at a premium? Is it a good investment?

Bonds / Fixed Income
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4 weeks ago
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The face value of a single bond is typically $1,000. This means that at the bond's maturity date, the holder will get the final interest payment plus $1,000 per bond. When a bond is trading at a premium, it is priced above $1,000 per bond. This can happen if the bond is paying a coupon that is above the prevailing interest rate for the duration in question. This premium paid will represent a capital loss if the bond is held to maturity because it will still pay back $1,000 at maturity (provided the issuer does not default). With that being said, a bond trading at a premium is not necessarily a good or bad investment. It really depends on your objectives and the circumstances causing the premium to exist. The converse is when a bond trades below face value. This is called a discount. And, there are reasons for this condition such as interest rates, credit rating outlook, etc. And, it is worth noting that premium/discount amounts can and do vary over the course of a bond's life span.

4 weeks ago
November 2004
4 weeks ago