When bonds are issued or sold for more than their par value, the bond premium is the difference between their price and their par value.
When bonds are originally issued or traded later on the secondary market, they may sell for more or less than their par value. A bond’s price depends on how its coupon rate – the interest rate it will pay to bondholders – compares to current interest rates on the market.
If a bond’s coupon rate is higher than the current market rate, it will sell for more than its par value, or at a premium. For example, if $100 million of 20-year term bonds pay 5 percent interest while the market rate is 4 percent, the bonds may sell for $114 million: $100 million of par value and a $14 million premium.
The original issue premium is the bond premium when the bond is issued. After the bonds are issued, the issuer records them on its financial statements at their book value, which is their par value plus the original issue premium. As time passes, the premium is amortized, or gradually decreased, and the bonds’ book value correspondingly decreases. Right before the bonds mature, they are recorded on the issuer’s financial statements at $100 million, their par value.
