What does it mean if a municipal bond is purchased at $105.00?

Purchasing a municipal bond at $105.00 indicates that the bond is being bought at a price above its face value, which is typically $100. When a bond is sold for more than its par value, it is referred to as being purchased at a premium.

This situation typically occurs when the bond's coupon rate (the interest rate it pays) is higher than the prevailing market rates for similar bonds. Investors may be willing to pay more than par to secure the higher interest payments that the bond offers. Hence, the price of $105.00 signifies a premium, as it reflects an elevated value due to the desirability of the bond's return compared to current market offerings.

Understanding this concept is crucial for bond investors, as it impacts yield calculations and investment strategies. Purchasing a bond at a premium can also affect the total return on investment, especially if the bond is held to maturity or sold before maturity.