A bond trading above par is described as trading at a premium. What is the correct term in this case?

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Multiple Choice

A bond trading above par is described as trading at a premium. What is the correct term in this case?

Explanation:
When a bond trades above its face value, the price is described as trading at a premium. This happens because the bond’s coupon payments are relatively high compared with current market rates, so investors are willing to pay more than the par value to receive those attractive cash flows. The par value is the amount repaid at maturity, and when the price exceeds that amount, we say the bond is at a premium. In contrast, if the price is below par, it’s a discount, and if it’s exactly at par, it’s at par. “Overpriced” isn’t the standard term used in bond pricing.

When a bond trades above its face value, the price is described as trading at a premium. This happens because the bond’s coupon payments are relatively high compared with current market rates, so investors are willing to pay more than the par value to receive those attractive cash flows. The par value is the amount repaid at maturity, and when the price exceeds that amount, we say the bond is at a premium. In contrast, if the price is below par, it’s a discount, and if it’s exactly at par, it’s at par. “Overpriced” isn’t the standard term used in bond pricing.

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