When a bond is issued at a premium, its price is higher than the amount it pays at maturity. This bond costs so much because it offers a higher interest rate than comparable investments, and its high returns increase demand for the bond. For comparison, if a bond offers a lower rate than comparable investments, its demand drops, so it sells for a discount. To find a bond's interest rate from its premium, you need a physical or online financial calculator.
Add the bond's premium to its face value to calculate its price. For example, if a $2,000 bond is issued at a premium of $1,000, add $1,000 to $2,000 to get $3,000.
Type the bond's price into a financial calculator and then press "FV." With this example, type "3000."
Type the bond's face value into the calculator and then press "PV." With this example, type "2000."
Type the amount that the bond pays each year as its coupon, and then press the "PMT" key. For example, if the bond issuer offers to pay you $150 annually as a coupon, type "150."
Type the number of years until the bond matures and then press the "N" key. For example, if the bond will mature in 3 years, type "3."
Press the "compute" key and then press "i" to find the bond's internal interest rate. With this example, the $2,000 bond with a $1,000 premium offers an interest rate of 7.9 percent.
Items you will need
- Financial calculator
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