bond premium
Bond Premium is the extra amount above face value you pay for a bond because it pays higher interest than what new bonds are currently offering.
In plain English
"So they're selling me this FGN bond for ₦105,000 when it only pays back ₦100,000 at the end? That sounds like a scam," Adaeze said, staring at her broker's message.
"It's not a scam, it's a premium," her cousin Chidi replied. "That bond is paying 14% interest when new bonds are only offering 11%. People are willing to pay extra now to lock in that fatter interest for years to come."
That extra ₦5,000 is the bond premium. It exists because bonds are not static things sitting calmly on a shelf. Once issued, they trade in the market, and their price moves depending on how their fixed interest rate compares with whatever rate is fashionable at the moment.
If interest rates in the wider economy fall after a bond was issued, that old bond, still paying its original higher rate, becomes attractive. Everyone wants it, so its price rises above its face value. You are effectively paying for the privilege of better income than the market currently offers.
The flip side is a bond selling at a discount, below face value, because its rate has become unfashionable compared to newer, juicier options.
A Nigerian in Leeds sending money home to buy FGN savings bonds for his mother should know this. If he buys a bond trading at a premium, he is not being cheated. He is buying certainty of a good return for longer, and paying a fair price for that comfort.
A bond with a ₦100,000 face value and 15% coupon is trading at ₦108,000 because new bonds only offer 12%. The ₦8,000 extra is the premium, the price of holding a better paying bond in a lower rate world.
Questions people ask
Do I lose the premium I paid when the bond matures?
In a sense, yes. At maturity you only get back the face value, not what you paid. But you were compensated along the way through the higher interest payments, which is why you paid the premium in the first place.
Why would anyone pay more than a bond is worth?
You are not overpaying, you are paying fairly for higher income. A bond at a premium usually still gives a reasonable overall return once you account for the extra interest it pays compared to newer bonds.
How do I know if a bond is trading at a premium or a discount?
Compare its coupon rate with current market interest rates for similar bonds. If its rate is higher, it likely trades at a premium. If lower, expect a discount.
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