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.
Step 1
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.
Step 2
Type the bond's price into a financial calculator and then press "FV." With this example, type "3000."
Step 3
Type the bond's face value into the calculator and then press "PV." With this example, type "2000."
Step 4
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."
Step 5
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."
Step 6
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.
References
Resources
Writer Bio
Ryan Menezes is a professional writer and blogger. He has a Bachelor of Science in journalism from Boston University and has written for the American Civil Liberties Union, the marketing firm InSegment and the project management service Assembla. He is also a member of Mensa and the American Parliamentary Debate Association.