Premium (bond)
Financial Accounting glossary · Liabilities & Bonds Payable
Definition
Excess of a bond's issuance price over its face value, arising when the coupon rate exceeds the market yield at issuance. Amortized over the bond's life using the effective interest method, reducing reported interest expense each period.
Premium (bond) in plain English
A bond is basically an IOU: an investor lends money and the borrower pays regular interest (the 'coupon') plus the amount owed at the end. A bond sells at a premium when investors happily pay MORE than its face value, and that happens when its coupon rate is juicier than what new bonds are paying at the time. It's like paying extra for a gift card that gives 5% cash back when every other card only gives 2% — the better perk is worth a higher price. Because the company effectively got that extra cash up front, it spreads (amortizes) the premium over the bond's life using the 'effective interest method,' which slightly lowers the interest expense it reports each period.
Also called: bond
Learn these first
Related Financial Accounting terms
Financial Accounting practice questions · Financial Accounting flashcards · Financial Accounting study guide