How Do You Spell BOND PREMIUM?

1. Bond premium is a financial term that refers to the amount by which the price of a bond exceeds its face value or nominal value. It represents the additional payment made by an investor when purchasing a bond at a price higher than its par value. The premium is determined as the difference between the purchase price and the face value of the bond.

   This concept arises due to changes in prevailing interest rates in the market. When interest rates fall, the yields on existing bonds become more attractive, resulting in an increase in their price. Consequently, investors are willing to pay a premium to acquire these bonds with higher coupon rates than what is currently available in the market.

   The bond premium, being the excess amount paid by the investor, has various implications. Firstly, the premium reduces the yield to maturity (YTM) of a bond, lowering the overall return on investment for the bondholder. Secondly, the premium paid at the time of bond purchase may be amortized over the life of the bond, reducing the premium gradually and allowing the investor to offset the initial higher cost.

   Accounting-wise, bond premiums are classified as a liability on the issuing company's balance sheet. They are recorded as a long-term liability and are amortized over the life of the bond. This reduces the overall carrying value of the bond over time.

   In summary, bond premium refers to the extra amount paid by an investor to purchase a bond at a price above its face value. It is influenced by prevailing interest rates and affects the yield to maturity and accounting treatment of the bond.

The term "bond premium" has a straightforward etymology. The word "bond" comes from the Middle English "bond" or "band", which originates from the Old English "bonda", meaning "one who binds". It is related to the Old Norse "böndi" and the Germanic "bund". "Bond" refers to a binding contract or obligation.

Similarly, the term "premium" has its origins in Latin. The Latin word "praemium" (meaning "reward" or "prize") transformed into "premiere" in Old French and eventually became "premium" in English. It refers to an additional sum of money paid for insurance or an investment above the regular cost.

Combining these two words, "bond premium" refers to the additional amount paid for a bond, which may be higher than its par value or face value.