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A bond with a par value – or face value -- of $1,000 is selling at a premium when its price exceeds par. It’s selling at a discount when its price is less than par.

Bonds are correlated to interest rates. When interest rates go up, a bond’s market price will fall, and vice versa.

Suppose Bond A has a $1,000 face value. It’s paying a 5% coupon, and the current market interest rate is 3%. If the market interest rate goes down 1% after Bond A is purchased, the holder can sell the bond in the market for a profit, or a premium. The bond is paying more than the market rate, and the spread has increased to 3%.

Determining if a bond is a good investment depends on more than whether it’s selling at a premium, however. Other factors, such as the expectations for interest rates and the credit worthiness of the bond issuer, should also be considered.

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