Bond premium is the shorter name for premium on bonds payable, the amount by which a company receives more than face value when it issues bonds. A premium arises when the bond's coupon rate is higher than the market interest rate investors require, so they pay extra for the above-market interest payments. The main entry gives the pricing formula and a worked example.
How the term is used
For the issuer, bond premium is recorded in an adjunct account that is added to bonds payable on the balance sheet. Over the life of the bonds it is gradually reduced, which lowers interest expense below the cash interest paid each period. This process is described in the entry on amortization of bond premium, and it brings the carrying amount down to face value by maturity.
Investors use the term from the other side. A bond bought for more than its par value carries a premium that the holder will not get back at maturity, so the yield to maturity is lower than the coupon rate. Holders of taxable bonds in the United States can generally elect to amortize the premium for tax purposes, reducing the taxable interest they report each year.
Bond premium is the mirror image of bond discount, which arises when the coupon rate is below the market rate and the bond sells for less than face value.