A premium bond is a type of fixed income security that trades, or is valued, at a price above its face value. Premium bonds are primarily issued by corporations and governments, and typically come with higher coupon payments and longer maturities than other bonds of similar credit quality, which can make them attractive investments for those seeking higher yields from secure, reliable sources of income.

The premium of a bond over the face value is essentially the excess cost paid by the investor and is accounted for in the interest payments received from the issuer. A bond's premium can be determined both by the market interest rate and by the issuer's own credit rating. If the average market interest rate is high, investors must pay a premium for the bond above its face value in order to receive an acceptable return on their investment. Similarly, if the bond issuer's credit rating is low, investors may require a higher yield to compensate them for their risk of the issuer defaulting on their loan.

When a bond is issued, it bears a fixed coupon rate, meaning that it will pay a certain rate of interest to its holders on a regular basis. This rate reflects the current market rate. However, if bond prices increase, the coupon received may become less attractive when compared with higher-yielding options on the market.

To entice investors to purchase the bond, the issuer may choose to increase the coupon rate, making it more attractive than other options. This type of bond is referred to as a premium bond, and it has the potential to generate attractive returns for investors who are willing to assume the risk of the issuer defaulting.

On the other hand, if market conditions change and bond prices become depressed, some investors may choose to purchase a bond below its face value, resulting in a discount bond. This type of bond may offer investors a higher yield than premium bonds, however, they are generally less desirable as they carry an increased risk of losses in the event of the issuer's default.

Ultimately, premium bonds can be an effective tool for investors seeking reliable, secure sources of income, especially when market interest rates are high and the issuer's credit rating is strong. While there is no guarantee that a premium bond will offer superior returns when compared to other options, the potential to generate attractive yields can make them a viable choice for long-term investors.