A premium bond is one that trades in the secondary market for more than its par value (original price). When a bond’s coupon (interest) rate is higher than the current prevailing interest rates for new bonds, the bond will trade at a premium. This is due to investors’ willingness to pay a greater price for the bond’s higher yield.
When would a bond be sold at a discount or at a premium?
When a bond with a par value of $1,000 can be purchased for more than $1,000, it is selling at a premium, and when it can be purchased for less than $1,000, it is selling at a discount. Because interest rates fluctuate, bonds can be sold for more or less than their face value.
When might a premium bond be issued?
- A premium bond is one that trades at a higher price than its face value or costs more than the bond’s face value.
- Because its interest rate is higher than the prevailing market rate, a bond may trade at a premium.
- The bond’s price can also be influenced by the company’s and bond’s credit ratings.
- Investors are willing to pay a higher price for a creditworthy bond issued by a financially sound company.
When a bond is issued at a premium, what happens?
When a bond is issued at a premium, it signifies that the bond is sold for a price higher than its face value. This usually indicates that the bond’s contract rate is higher than the current market rate. The difference between the bond’s face value and the sales price must be amortized during the bond’s term, much like a discount bond. Unlike a bond issued at a discount, however, the process of amortizing the premium reduces the bond’s interest expense recorded on the issuing company’s books. The issuing firm will still be responsible for paying the bondholder the promised interest payments.
What does it indicate when a bond is sold at a discount or at a premium?
A premium bond is one that costs more than its face value, whereas a discount bond is one that costs less than its face value. Bonds with interest rates higher than current sell as a premium, while those with rates lower than current sell at a discount.
When bonds are issued at a premium, is the face amount credited to the bonds payable account?
When bonds are sold at a discount, the face amount is applied to the bonds payable account. A debenture bond is a type of mortgage bond. The process of approximating interest rates is known as imputation, and the resultant interest rate is known as an imputed interest rate.
When premium bonds are issued, the quizlet?
When a firm issues a bond at a discount, the interest expense will be greater than the annual interest paid. When bonds are issued at a premium, the interest expense is less than the interest paid on the bonds.
Why would you want to invest in a premium bond?
Because the bond’s stated interest rate (and thus the bond’s interest payments) will be higher than those projected by the present bond market, a person would buy it at a premium (pay more than its maturity value).
A bond investor may also be forced to make a decision. For example, if an investor wishes to buy a high-rated bond that matures in eight years, there may only be one bond available. If the bond’s advertised interest rate is higher than the market rate on the day of the transaction, the investor either pays a premium for the bond or doesn’t acquire it at all.
Are all bonds issued at par?
Bonds aren’t always sold for their face value. Depending on the level of interest rates in the economy, they could be granted at a premium or at a discount. A bond that is trading at a premium is said to be trading at a premium, whereas a bond that is trading at a discount is said to be trading at a discount. A higher proportion of bonds will trade over par or at a premium during periods when interest rates are low or have been going lower. When interest rates are high, a greater percentage of bonds trade at a discount. A bond with a face value of $1,000 that is now trading at $1,020 is said to be trading at a premium, whilst a bond with a face value of $950 is said to be trading at a discount.
Is the effective rate higher than the quoted rate when bonds are sold at a premium?
False; When the stated rate is higher than the effective rate, a bond sells at a premium. If a bond sold for 97 cents on the dollar, the market rate was: A. the same as the quoted rate.
What is the amount recorded on the balance sheet when a bond is sold at a premium?
The premium or discount on bonds payable that has not yet been amortized to interest expense will be reflected in the liabilities section of the balance sheet immediately after the par value of the bonds. The amounts will be reported in the long-term or noncurrent liabilities column of the balance sheet if the bonds do not mature within one year of the balance sheet date.