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.

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.


Filed Under: ,

comments powered by Disqus
Hot Definitions
  1. Jensen's Measure

    A risk-adjusted performance measure that represents the average return on a portfolio over and above that predicted by the capital asset pricing model (CAPM), given the portfolio's beta and the average market return. This is the portfolio's alpha. In fact, the concept is sometimes referred to as "Jensen's alpha."
  2. Direct Bidder

    An entity that purchases Treasury securities at auction for a house account rather than on behalf of another party.
  3. Mortgage Modification

    A permanent change in a homeowner's home loan terms that makes the monthly loan payments affordable.
  4. Leveraged Benefits

    The use – by a business owner or professional practitioner – of their company’s receivables or current income to secure a loan whose proceeds then indirectly fund a retirement plan.
  5. Direct Consolidation Loan

    A loan that combines two or more federal education loans into a single loan. A Direct Consolidation Loan allows the borrower to make a single monthly payment. The loan is facilitated by the U.S. Department of Education and does not require borrowers to pay an application fee.
  6. Through Fund

    A type of target-date retirement fund whose asset allocation includes higher risk and potentially higher return investments "through" the fund's target date and beyond.
Trading Center