What does it indicate if a bond is trading at a premium?

When a bond trades at a premium, it means that its market price is above its face (or par) value. This typically occurs when the coupon rate, which is the fixed interest rate paid to bondholders, is higher than the current market interest rates for similar bonds. Investors are willing to pay more for a bond that provides higher interest payments compared to what is available in the market, leading to a price above par.

This situation reflects strong demand for the bond due to its attractive yield compared to new issues or other investment alternatives. In contrast, factors such as high credit risk or a recent default would likely decrease demand and cause the bond to trade at a discount rather than a premium. Thus, the bond’s trading at a premium serves as an indication of its favorable coupon rate relative to prevailing market rates.