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Premium Bond

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Dictionary Says

Definition of 'Premium Bond'

1) A bond that is trading above its par value. A bond will trade at a premium when it offers a coupon rate that is higher than prevailing interest rates. This is because investors want a higher yield, and will pay more for it.

2) A specific type of bond issued in nations such as the United Kingdom and Canada. In the U.K., premium bonds are referred to as a lottery bond issued by the British government's National Savings & Investment scheme. In Canada, the Canada Premium Bond, first introduced in 1998, offers a higher interest rate at the time of issue than a comparable Canada Savings Bond.

Investopedia Says

Investopedia explains 'Premium Bond'

For example, if a bond has a 7% coupon at a time when the prevailing interest rate is 5%, investors will "bid up" the price of the bond until its yield to maturity is in line with the market interest rate of 5%. As a result of this bidding up process, the bond will trade at a premium to its par value.

A bond premium will reduce the yield to maturity of the bond, while a bond discount will enhance its yield. The size of the premium will decline as the bond approaches maturity. The premium will dwindle to zero at maturity, since bond issues are generally redeemed at par.

Related Definitions

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    Par Value

    1. The face value of a bond. 2. A dollar amount that is assigned to a security when representing the value contributed for each share in cash or goods.
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  • Face Value

    The nominal value or dollar value of a security stated by the issuer. For stocks, it is the original cost of the stock shown on the certificate. For bonds, it is the amount paid to the ...
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  • Yield To Maturity - YTM

    The rate of return anticipated on a bond if it is held until the maturity date. YTM is considered a long-term bond yield expressed as an annual rate. The calculation of YTM takes into ...
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    • Discount Bond

      A bond that is issued for less than its par (or face) value, or a bond currently trading for less than its par value in the secondary market. The "discount" in a discount bond doesn't ...
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    • Lottery Bond

      1. A type of government bond issued in the United Kingdom by National Savings and Investment (NS&I) that gives the holder a chance to win a random monthly drawing for a tax-free cash ...
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    • Amortizable Bond Premium

      A tax term referring to the excess premium paid over and above the face value of a bond. Depending on the type of bond, the premium can be tax deductible and amortized over the life of ...
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    • Canada Premium Bond - CPB

      A debt instrument issued by the Bank of Canada that offers a higher interest rate than a Canada Savings Bond (CSB) with the same issuance date.
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    • Unamortized Bond Premium

      The difference between the par-value or face-value of a bond and the price above this face value, at which the bond has been issued. Unamortized bond premiums do not include any interest ...
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