The amount by which the total interest cost associated with a bond issue is lower than the total interest payment. For example, XYZ issued bonds at a market interest rate that is lower than the face interest rate, in which case the bonds were issued at a premium because the market rate dropped below the stated rate.

Bond premium= total interest payment – total interest expense

In accounting, the difference between interest expense and payment has to be accounted for (whether it is a discount or a premium). More specifically, the difference (premium in this case) has to be reduced or eliminated to equate the the carrying value of bonds payable at maturity with face value by systemically narrowing it down (i.e., the premium) over time. This involves amortization of the premium over the lifespan of the bonds (using either the straight-line method– SLM, or the effective interest rate method.

A bond issued at a premium entails the payment of a market or effective interest rate that is lower than the face rate (on the bond), because the interest cost for the issuer is the difference between stated interest payments and the bond premium:

Interest cost = stated interest payments – bond premium

The bond premium constitutes a reduction in the interest cost because it entails payment of a lower amount (than the issue price) that an issuer makes on a bond’s maturity date (to bondholders).