premium bond

premium bond definition - business

premium bond

A bond that sells at a price above its par value. An investor must be careful about purchasing a bond that is selling at a premium because of the possibility of a call by the bond's issuer for sinking fund requirements or for refunding. Except for convertible bonds, the size of a bond's premium usually can be expected to decline as the bond approaches maturity, at which time it will be redeemed at par.

My broker says I shouldn't purchase bonds that sell above par. Is this good advice?

Not necessarily. All else equal, a bond may be priced at a premium because it has a high coupon rate or is deemed to have a relatively safe credit rating—characteristics which many may find desirable. Both discount bonds and premium bonds can be the right choice depending on numerous conditions, including your views on the upcoming movement in interest rates. For example, premium bonds tend to have a lower duration, which can result in lower volatility and prove safer during a sudden rise in interest rates. There are many factors to evaluate when considering investing in bonds, and the decision should not be made exclusively on whether the bond is above or below par.

Noah L. Myers, CFP®, Principal and Chief Investment Officer, MiddleCove Capital, Centerbrook, CT

The American Heritage® Dictionary of Business Terms Copyright © 2009 by Houghton Mifflin Harcourt Publishing Company. Published by Houghton Mifflin Harcourt Publishing Company. All rights reserved.

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