Final answer:
A bond is issued at premium when its coupon rate is higher than the prevailing market interest rates, making it more valuable to investors who are willing to pay more than its face value to acquire it.
Step-by-step explanation:
A bond is issued at premium when the market interest rates are lower than the coupon rate of the bond. Bonds are debt securities under which the issuer owes the holders a debt and, according to the terms, is obligated to pay them interest and repay the debt on the maturity date. When a bond is issued, for example, if the interest rates are at 5%, and the bond has a $1,000 par value with an annual coupon of 5%, it will generate $50 annually to the bondholder. If market rates drop, this bond still pays at 5%, which makes it more attractive to investors who might be willing to pay more than the par value for this bond, hence, it is issued at a premium.
Conversely, if the interest rates go up after a bond has been issued, the existing bond with a lower coupon rate becomes less attractive. To make it appealing to investors, it will have to be sold at a discount, that is, below its face value. So, if a bond is purchased when interest rates are higher than the bond's coupon rate, an investor would expect to pay less than the bond's face value.