By Bondsquawk:
By Nicholas Gliagias and Rom Badilla, CFA
Many bond investors do not like the idea of purchasing a premium bond, or a bond that is priced at more than its principal amount. They would rather buy a bond at a discount or at par value because it looks like the "better deal." Contrary to popular opinion, premium bonds can actually be advantageous to the investor.
Although paying a premium for a bond at the time of the purchase may seem unattractive, that outflow of cash that was spent is recouped through higher coupon payments over time. Premium bonds are attractive for their high coupon rates that are greater than current market yields. In other words, the higher initial cost can be offset by the higher cash payments received throughout the life of the bond.
Let's examine how a premium bond can be more beneficial than a discount bond. In this
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