Learn what a premium bond is and why bonds trade above face value when
A premium bond is a bond that trades above its face value. That usually happens when the bond’s coupon rate is higher than the yield offered by comparable bonds in the current market.
Investors pay a premium because the bond offers a stronger coupon stream than the market now requires for similar risk and maturity. The higher purchase price, however, means the bond’s yield to maturity is lower than the coupon rate by itself might suggest.
If a bond with a $1,000 face value trades at $1,060, the extra $60 is the premium built into the price.
An investor says, “A premium bond must have a higher yield than a discount bond because it costs more.”
Answer: No. The higher price is often exactly why the yield is lower than the coupon rate alone would suggest.