What Are Premium Bonds? Overview, Benefits & Yield

By Lyle Daly – Updated Jan 31, 2025 at 2:28 PM

Key Points

Premium bonds cost more than their face value due to higher interest rates or the issuer's improved credit rating.
Investors must analyze if the extra interest from the premiums outweighs the added cost.
Selling premium bonds may be beneficial if market rates fall and you need the money.

Premium bonds trade at a price higher than their face value. Investors pay more for these bonds, typically because they have an advantage compared to other bonds that are currently on the market. If you invest in bonds, it’s important to know how premium bonds work, their benefits, and their risks.

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Close-up bond market trading screen with rising yields. Coupons, rates, yields and other informations are displayed. — Image source: Getty Images.

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Understanding premium bonds

Every bond has a face value, a term, and an interest rate. When you buy a bond, you receive interest payments, typically every six months, for the entire term. Once the bond matures, you receive the face value. If the bond has a face value of $10,000, that’s how much you would receive on the maturity date.

Bonds are also traded on the secondary market, where their prices fluctuate. A bond that costs more to buy than its face value is a premium bond. For example, a $10,000 bond that’s trading for $11,000 has a $1,000 premium. You need to pay more for the bond than the amount you receive when it matures. A discount bond, on the other hand, is one trading for less than its face value.

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About the Author

Lyle Daly is a contributing Motley Fool stock market analyst covering information technology and cryptocurrency. Lyle has been a contributor at the financial services company since 2018. His work has been featured on USA Today, Yahoo Finance, MSN, Fox Business, and Nasdaq. Before joining The Motley Fool, he wrote for financial brands including Intuit.

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