How to Purchase Premium Bonds

There are two main ways to invest in a company. You can invest via bonds or stocks. Bonds represent debt for the company, and the company pays the bondholder interest for the loan. The rate of interest depends on the creditworthiness of the company.

In general, bond prices move in tandem with current interest rates; that is, as interest rates go down, bond prices go up as outstanding bonds are usually paying a higher rate of interest than current (low) interest rates.

 

4 Steps to Purchase Premium Bonds

 

1. Understand what makes a bond sell at a premium.

This occurs when the interest rate on the bond is higher than current interest rates, which makes the bond with the higher rate worth more money in the market.

 

2. Identify and find bonds selling at a premium.

Purchase or borrow a Wall Street Journal or Investor’s Business Daily newspaper from your local book store or library.

Turn to the bond tables. Look for bonds trading over $1,000, which represents the normal trading price for a bond. If the bond pays the same interest rate as the market is paying, the bond will be trading at a $1,000.

 

3. Walk through a quick example.

Let’s say you own a bond that is paying 5 percent (5 percent coupon), however, current market interest rates are at 8 percent. This bond is trading at a discount to the normal bond price.

You also have a bond with a coupon rate of 10 percent. This bond is trading over $1,000 (at a premium). The latter bond is more attractive.

 

4. Contact your broker.

After you’ve identified a few companies with premium bonds (bonds trading over $1,000), contact your broker and let them know which companies you might be interested in buying. They might also be able to provide additional recommendations for bonds selling at a premium.

 

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