The amount by which a bond’s price exceeds its maturity value (i.e., par value). In other words, it is the amount an investor pays for a bond over and above its stated principal amount. Intrinsically, bond prices are linked to the interest rate prevailing in the market where a bond trades. The connection with interest rate is typically negatively correlated: bond prices fall as interest rates rise, and vice versa. Bond prices are determined in a way that investors can get a certain return on their bond holdings.
For example, if the price of a given bond is $1,100, while its maturity value is set at $1,000, the bond premium is:
Bond premium = bond price – par value
Bond premium = 1,100 – 1,000 = $100
Bond premium comes into existence when the value of a bond has increased above its par value due to falling interest rates.
It is the opposite of a bond discount.
