What characterizes a premium bond?

A premium bond is characterized by being sold above par value. This situation arises when the bond's coupon rate, which is the interest paid to bondholders, is higher than the prevailing market interest rates for similar bonds. Consequently, investors are willing to pay more than the bond’s face value (or par value) to receive the higher interest payments.

This premium reflects the bond’s attractiveness compared to other investment options at the time of its sale. As market interest rates rise, the price of existing bonds with lower rates falls, leading to discounts; conversely, when rates fall, bonds with higher fixed rates become more desirable and thus command a premium. Understanding this concept is crucial for financial professionals who manage municipal bonds and investments, as it has direct implications on investment strategies and assessing the market environment.

The other answer choices refer to different pricing situations for bonds: sold below par value pertains to discount bonds, sold at par value indicates bonds that are priced exactly at their face value, and the mention of a variable interest rate does not define a premium bond since it can apply to various types of bonds, including those sold at different price points.