What is the market condition when long-term debt sells at a premium?

When long-term debt sells at a premium, it indicates that the stated interest rate on the debt exceeds the market interest rate. This situation arises because investors are willing to pay more for a bond or debt instrument that offers a higher return, reflected in the stated interest rate, compared to what is currently available in the market.

When the stated rate is higher, investors perceive the bonds as more valuable since they provide more favorable cash flows than new issuances, which may pay lower interest due to changes in market conditions. Therefore, the price of these bonds will rise until the yield, or effective interest returned to investors, aligns with prevailing market rates.

In contrast, if the stated rate were less than the market rate, the demand for that debt would decrease, resulting in a discount price. Similarly, if the rates were equal, the debt would typically be valued at par. Stability in interest rates does not directly dictate the premium or discount status of bonds; rather, it pertains more to the relationship between the stated and prevailing market rates.