Premium Bond

### Does a premium bond sell for more or less than its face value? - [ ] Less - [x] More - [ ] Exactly the same - [ ] It can sell for any value > **Explanation:** A premium bond sells for more than its face value. For example, a bond with a face value of $1,000 might sell for $1,050. ### Why might investors be willing to pay more than the face value for a bond? - [x] Because of a higher coupon rate compared to market interest rates - [ ] Because of a lower coupon rate - [ ] Because of shorter maturity - [ ] Due to lower credit rating of the issuer > **Explanation:** Investors may be willing to pay a premium if the coupon rate on the bond is higher than the prevailing market interest rates, which provides better periodic returns. ### How is the premium on a bond treated for tax purposes? - [ ] Fully deductible in the year of purchase - [ ] Cannot be deducted at all - [x] Amortized on a straight-line basis over the life of the bond - [ ] Only deductible when the bond is sold > **Explanation:** The premium on a bond can be amortized on a straight-line basis over the life of the bond, reducing the taxable interest income each year. ### What happens to the premium paid when a bond matures? - [ ] It is recovered along with the face value - [ ] It is added to the interest payment - [ ] It is lost because only the face value is returned - [x] It is treated as a sunk cost > **Explanation:** When a bond matures, only the face value is returned. The premium paid originally is not recovered, making it effectively a sunk cost. ### Which feature primarily differentiates a premium bond from a discount bond? - [x] Selling price relative to face value - [ ] Type of issuer - [ ] Maturity date - [ ] Coupon payment frequency > **Explanation:** A premium bond sells for more than its face value, whereas a discount bond sells for less than its face value. This difference in selling price relative to face value is the key differentiator. ### Which method is used to amortize the premium on premium bonds for tax purposes? - [x] Straight-line method - [ ] Double declining balance method - [ ] Units of production method - [ ] Sum of the years' digits method > **Explanation:** The straight-line method is commonly used to amortize the premium on bonds over the life of the bond for tax purposes. ### What does the face value of a bond represent? - [x] The amount paid to the bondholder at maturity - [ ] The original issue price - [ ] The market price of the bond - [ ] The interest earned over the bond's life > **Explanation:** The face value, or par value, of a bond represents the amount that will be paid to the bondholder at maturity. ### What is a bond premium? - [ ] The interest payment made by the bond issuer - [ ] The difference between the issue price and face value when sold at a discount - [x] The amount by which the purchase price exceeds the face value - [ ] The amount by which interest exceeds the coupon rate > **Explanation:** A bond premium is the amount by which the purchase price of a bond exceeds its face value. ### Could a bond with a face value of $1,000 be sold as a premium bond at $900? - [ ] Yes - [x] No - [ ] Only if interest rates fall - [ ] Only if interest rates rise > **Explanation:** A bond selling for $900 is below its face value of $1,000, making it a discount bond, not a premium bond. ### What happens to the bondholders' interest income if the premium on a bond is amortized? - [ ] It increases for tax reporting - [ ] It remains unchanged - [ ] It is not affected at all - [x] It decreases as the premium amortization reduces the interest income > **Explanation:** Amortizing the bond premium reduces the bondholder's reported interest income, thus lowering taxable income.