Any bond that commands a price that is higher than its face value is a premium bond. For instance, if a bond has a face value of USD 500 and it commands a price of USD 700 then this bond is said to command a premium of USD 200. This amount is the difference between the face value and the market value of the bond. There could be many reasons for a bond to command a premium, such as:
Higher interest rates
When the interest rate in a new bond issue is lower than the current market rate for that bond then the bonds held by the older investors would command a premium due to their higher coupon rates.
Upgraded credit rating
When leading credit rating agencies like Standard and Poor or Moodys decide to upgrade an outstanding bond it could command a higher price and thereby, a premium.
Increase in the bond issue’s liquidity
When the bond issue’s liquidity or marketability increases it can command a premium with higher market activity and easier convertibility.
Bond’s perceived credit risk decreases
When there are fundamental improvements in the issuing authority’s profile that minimize a part of the bond’s perceived credit risk or eliminates them the said bond could command a premium. This is because the bond is fundamentally stronger now.
Bond issue’s liquidity risk decreases
When the inherent weaknesses of a bond’s marketability are eliminated or marginalized the said bond could command a premium.
CPB (Canada Premium Bonds)
These are bonds issued by the Canadian government and they count among the most popular bonds of Canada along with CSB (Canada Savings Bond).
The CPB offers a higher interest rate than the CSB at the time of issue and can be redeemed once a year. It is ideal for investors seeking higher interest, without instant redemption.
Premium Bond issued by the government of the UK
The UK government has one of the most innovative premium bonds found anywhere. In the case of the UK premium bonds the interest accrual goes into a lottery prize fund for the duration of the bond. Investors can win prize money ranging from £ 50/- to £ 1,000,000 and the popularity of the bond is vindicated by its investor base of over 23 million.
Higher interest rates
When the interest rate in a new bond issue is lower than the current market rate for that bond then the bonds held by the older investors would command a premium due to their higher coupon rates.
Upgraded credit rating
When leading credit rating agencies like Standard and Poor or Moodys decide to upgrade an outstanding bond it could command a higher price and thereby, a premium.
Increase in the bond issue’s liquidity
When the bond issue’s liquidity or marketability increases it can command a premium with higher market activity and easier convertibility.
Bond’s perceived credit risk decreases
When there are fundamental improvements in the issuing authority’s profile that minimize a part of the bond’s perceived credit risk or eliminates them the said bond could command a premium. This is because the bond is fundamentally stronger now.
Bond issue’s liquidity risk decreases
When the inherent weaknesses of a bond’s marketability are eliminated or marginalized the said bond could command a premium.
CPB (Canada Premium Bonds)
These are bonds issued by the Canadian government and they count among the most popular bonds of Canada along with CSB (Canada Savings Bond).
The CPB offers a higher interest rate than the CSB at the time of issue and can be redeemed once a year. It is ideal for investors seeking higher interest, without instant redemption.
Premium Bond issued by the government of the UK
The UK government has one of the most innovative premium bonds found anywhere. In the case of the UK premium bonds the interest accrual goes into a lottery prize fund for the duration of the bond. Investors can win prize money ranging from £ 50/- to £ 1,000,000 and the popularity of the bond is vindicated by its investor base of over 23 million.
