Bonds selling at a premium price offer a higher current yield (which overstates the true return)than bonds selling at par value.

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A bond that is priced above its face value is said to sell at a premium.Investors who buy a bond at a premium face a capital loss over the life of the bond,so the return on these bonds is always less than the bond's current yield.A bond priced below face value sells at a discount.Investors in discount bonds face a capital gain over the life of the bond; the return on these bonds is greater than the current yield: Because it focuses only on current income and ignores prospective price increases or decreases,the current yield does not measure the bond's total rate of return.It overstates the return of premium bonds and understates that of discount bonds.

Bonds Selling at a Premium Price Offer a Higher Current