What Is A Premium Bond?

What Is A Premium Bond? Depending on where you are investing, premium bonds can mean one of two things. In the United States as well as most other bond markets around the world, premium bonds refer to bonds which carry a higher price than their par value. For this to occur the bond price would have to be more than its face value trading on the open market at an interest rate paying better than a similar bond. For example if there were two equal bonds with a face, or par value of $10,000 and one bond was paying 5% interest and the second bond paying 8% interest, the second bond would have to be bought at a premium. A price over its par value when compared to the 5% bond. Simple economics: the premium bond is paying more interest in the form of coupon payments so it is more valuable to the investor. When looking at a bond price, it is important to consider all the facets which affect it’s inherent value. The face value and interest are just parts of an overall bond’s price and value.

UK Premium Bonds

In the United Kingdom a very different and unique UK premium bond exists. This type of bond refers to a lottery held throughout the year in the UK which awards bond holders prizes in addition to guaranteed repayment of the original investment. In this way, a UK premium bond is a government bond in it’s definition. The key difference in UK premium bonds is that the amount of interest paid is very low, currently 1%, so the investor is hoping to receive a tax-exempt lottery prize from a monthly drawing. Each investor is said to have approximately a 1 in 24,000 chance of a cash price ranging from 1 pound to 1,000,000. The lottery payments are accrued from interest on the money deposited to the government via the premium bonds.

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1. What Is Bond Maturity?
2. What Is A Treasury Bond?
3. What are Government Bonds?
4. What Is A Municipal Bond?
5. What Is A Bond Issuer?