In this case, the bond will trade at a premium, hence it can be called a premium bond. Let’s consider a conventional bond with the following features: Face value of bondĪnnual stated interest rate (coupon rate)īy just comparing the market interest rate with the annual coupon rate, you can tell if the bond will trade a discount or premium. coupon payments and the par value) determined based on the market interest rate. A bond is valued at the present value of its future cash flows (i.e. This is based on the most fundamental time value of money relationship in that the present value decreases with an increase in the interest rate.
It is because the bond is overcompensating the bond-holder in terms of interest payments and the bond must fetch a premium. If the market interest rate is lower than the coupon rate, the bond must trade at a price higher than its par value. coupon payments based on the stated interest rate.
The bond premium must be amortized over the life of the bond using the effective interest method or straight-line method.Ī bond has a stated interest rate which is also called coupon rate. When a bond is issued at a price higher than its par value, the difference is called bond premium.
0 kommentar(er)
