Bond premium

A bond premium is the amount by which the purchase price of a bond exceeds its face value. This situation arises when a bond's stated interest rate is higher than the current market interest rate. Investors are willing to bid up the price of this bond until its effective interest rate is the same as the current market interest rate, adjusted for the risk associated with the bond. For example, if a bond with a face value of $1,000 is bought by an investor for $1,080, the bond premium is $80. Over time, the investor amortizes this premium until the book value of the bond equals its face value by the maturity date of the bond.