Premium Bond


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.


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BREAKING DOWN '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.

  1. Yield To Maturity (YTM)

    The total return anticipated on a bond if the bond is held until ...
  2. Discount Bond

    A bond that is issued for less than its par (or face) value, ...
  3. Par Value

    The face value of a bond. Par value for a share refers to the ...
  4. Unamortized Bond Premium

    The difference between the par-value or face-value of a bond ...
  5. Face Value

    The nominal value or dollar value of a security stated by the ...
  6. Lottery Bond

    1. A type of government bond issued in the United Kingdom by ...
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