Bond Premium

A bond premium occurs when a bond's market price exceeds its face (par) value, which is typically $1,000. This happens primarily when the bond's coupon rate is higher than current market interest rates — investors are willing to pay more than par to receive the above-market coupon payments. For example, if a bond pays a 6% coupon but newly issued bonds only pay 4%, the older bond will trade at a premium because its income stream is more valuable. The premium gradually decreases as the bond approaches maturity (pull to par), since the bondholder receives only par value at maturity regardless of what they paid. For taxable bonds, the IRS allows investors to amortize the premium over the remaining life of the bond, reducing taxable interest income each year. This amortization benefit makes premium bonds attractive to investors in high tax brackets who can offset coupon income with the annual premium write-down.