Why We Love Premium Bonds And You Should Too
A common error made by many bond investors is to avoid purchasing premium bonds – bonds that trade above their face value (or par, typically 100). A bond will trade at a premium when the coupon (stated) yield is above the current market rate for a similar bond of the same remaining term to maturity.
Many investors avoid premium bonds because they don’t want to buy a product that they believe comes with a guaranteed loss built into the price. You pay above par, yet receive only par at maturity. This is a major mistake. In fact, the higher annual interest payments received for premium bonds offset the amortization of the premium paid. So when building individual bond portfolios, we at Buckingham – where I am director of research – don’t try to avoid premium bonds. We generally prefer them because they offer a number of excellent advantages over discount or par bonds.
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