When a bond is purchased at a price above its face value, the excess amount paid is referred to as:

• A. Par value
• B. Discount
• C. Coupon
• D. Premium

Answer: (D)

Verified step by step guidance

1. Understand the concept of bond pricing: Bonds can be purchased at face value (par), below face value (discount), or above face value (premium). The price depends on market conditions and the bond's interest rate relative to prevailing rates.
2. Define 'premium': A bond is purchased at a premium when its price exceeds its face value. This happens when the bond's coupon rate (interest rate) is higher than the current market interest rate, making it more attractive to investors.
3. Differentiate between the terms: 'Par value' refers to the bond's face value, 'Discount' refers to a bond purchased below its face value, and 'Coupon' refers to the periodic interest payment made to bondholders.
4. Relate the excess amount paid to the term 'premium': The premium represents the additional amount paid above the bond's face value, reflecting its higher desirability due to favorable interest terms.
5. Conclude that the correct term for the excess amount paid above the bond's face value is 'Premium,' as it aligns with the definition and context provided.