Which term refers to the condition of a bond where the stated interest rate is higher than the current market rate?

The term that describes a bond where the stated interest rate is higher than the current market rate is known as a premium bond. When a bond is issued with a coupon rate that exceeds prevailing market interest rates, investors are willing to pay more than the face value for that bond. This is because the higher interest payments are more attractive than what is being offered in the current market, making the bond more valuable.

In simpler terms, since the bond provides yields that are superior compared to new bonds issued at the lower market rates, it commands a higher price. This situation allows bondholders to benefit from those heightened interest payments over time, which justifies the increased purchase price.

Understanding this concept is crucial for investors, as it impacts investment decisions when comparing the yields of various bonds in different market conditions. It also highlights how market dynamics affect bond prices and investor behavior.