Final answer:
The excess of a bond's issue price over its face value is known as a premium. It occurs when the market interest rates are lower than the bond's coupon rate, making the bond more attractive to investors and thereby pushing its price above face value.
Step-by-step explanation:
The excess of a bond's issue price over its face value is known as a premium. Bonds are essentially an "I owe you" issued by borrowers to investors in exchange for capital. The bond contains a face value, a coupon rate or interest rate, and a maturity date. The face value is what the borrower promises to pay back at maturity, while the coupon rate is the interest paid out, typically semi-annually. Market interest rates dictate the value of bonds to investors; if market rates are lower than the bond's coupon rate, the bond could sell for more than its face value, hence at a premium.
For instance, if a bond is issued at a time when market interest rates are 5%, and it is sold with an annual coupon of 5% based on its $1,000 par value, it will create $50 annually for the bondholder. Should the market interest rates decrease to 3.5%, this bond will remain at a 5% coupon rate, making it more attractive and likely to be sold at a premium over its face value. Conversely, if market rates rise, the bond may be sold at a discount.