Premium Bond


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.

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.


Investment dictionary. . 2012.

Look at other dictionaries:

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  • premium bond — A bond that is selling for more than its par value. Bloomberg Financial Dictionary * * * Premium Bond ˈPremium ˌBond noun [countable usually plural] FINANCE a numbered document that you buy from the government in Britain, which gives you the… …   Financial and business terms

  • premium bond — UK / US noun [countable] Word forms premium bond : singular premium bond plural premium bonds in the UK, a document with a number on it that people can buy from the government as a way of saving money. It gives people the chance to win money if… …   English dictionary

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