Why would you buy a bond at a premium?
A person would buy a bond at a premium (pay more than its maturity value) because the bond’s stated interest rate (and therefore the bond’s interest payments) will be greater than those expected by the current bond market. It is also possible that a bond investor will have no choice.
Why would you ever buy a bond at premium?
A bond might trade at a premium because its interest rate is higher than the current market interest rates. The company’s credit rating and the bond’s credit rating can also push the bond’s price higher. Investors are willing to pay more for a creditworthy bond from the financially viable issuer.
Is it better to buy a bond at discount or premium?
Discount bonds can be riskier but the lower the price, the higher the potential for gains. Premium bonds can deliver higher returns with less risk, but they can be problematic if they become callable.
Is it good to buy a premium bond?
Premium Bonds could be worth investing in if you: Have a lot of money to save (the more bonds you have, the bigger your chance of winning a prize) Pay tax on savings interest (and have already used up your annual cash ISA allowance) Like the idea of a prize draw (you could win big, but you also may not win anything)
Why would you buy a bond at a discount?
Discount bonds can indicate the expectation of an issuer’s default, falling dividends, or a reluctance of investors to buy the debt. Discount bonds with longer-term maturities have a higher risk of default. Deeper discounted bonds indicate a company is in financial distress and is at risk of default on its obligation.
What does it mean to buy a bond at a premium quizlet?
What does trading at a premium mean? It means that a bond’s coupon rate is lower than the current prevailing interest rates.
What happens to bond premium?
A bond premium occurs when the price of the bond has increased in the secondary market due to a drop in market interest rates. A bond sold at a premium to par has a market price that is above the face value amount.
What does it mean when a bond is selling at a discount at a premium?
For example, a bond with a par value of $1,000 is selling at a premium when it can be bought for more than $1,000 and is selling at a discount when it can be bought for less than $1,000. Bonds can be sold for more and less than their par values because of changing interest rates.
What does it mean when a bond is issued at a premium or a discount?
What Makes Them Different? A premium bond has a coupon rate higher than the prevailing interest rate for that bond maturity and credit quality. A discount bond, in contrast, has a coupon rate lower than the prevailing interest rate for that bond maturity and credit quality. An example may clarify this distinction.
What does trading at a premium mean?
“At a premium” is a phrase attached to situations where a current value or transactional value of an asset is trading above its fundamental or intrinsic value. For example, “Company X is trading at a premium to company Y.” Or, “A commercial building was sold at a premium to its underlying value.”
Why do some bonds sell at a premium some at par and some at a discount?
Answer and Explanation: 1. Some of the bonds are sold at a premium while others are sold at a premium because of the fluctuation in the interest rates of the bonds. Both of them move in different directions therefore, some are issued at a discount while some at a premium.
When bonds are issued at a premium quizlet?
When a company issues a bond at a discount: the company’s interest expense will be more than the interest paid each year. When bonds are issued at a premium: interest expense on the bonds will be less than the interest paid.