When a bond is sold at a premium, how does its interest rate compare to market interest rates?

When a bond is sold at a premium, it means the price of the bond is higher than its face value. This typically occurs when the bond's stated interest rate, or coupon rate, is greater than current market interest rates for similar bonds with comparable risk and maturity. Investors are willing to pay more for a bond that offers higher returns than what is currently available in the market, leading to the bond being sold at a premium.

This relationship is essential in bond pricing: as market interest rates rise, existing bonds with lower coupon rates become less attractive, causing their prices to drop. Conversely, when market interest rates decline, previous issues with higher interest rates can be more valuable, thus selling at a premium.

Understanding this concept is crucial for effective debt management, as it influences decisions regarding bond issuance and investment strategies.