A bond trades at a premium when its coupon rate is higher than prevailing interest rates. A bond trades at a discount when its coupon rate is lower than prevailing interest rates. At first glance, it may seem like a no-brainer: simply buy a discount bond at $970 and benefit as its price rises to $1000. Alternatively, buying a bond at a $1030 that’s going to mature at $1000 seems to make no sense. But keep in mind that this difference in price is made up for by the higher coupon in the case of the premium bond, and the lower coupon in the case of the discount bond. In other words, the bond trading at a premium will offer higher income payments than the bond trading at a discount, which makes up for the difference in price. A bond that is trading above its par value. A bond will trade at a premium when it offers a coupon rate that is higher than prevailing interest rates. This is because investors want a higher yield, and will pay more for it. When the stated interest rate on a bond is higher than the prevailing market price a company is able to sell its bonds for more than their par value. Investors consider the bond to be worth more than its par because it is offering a rate of return that is higher than the market rate of return.
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