Wearing Away of Premiums: An In-Depth Legal Overview
Definition & Meaning
The wearing away of premiums refers to the gradual decrease in the price at which government and other bonds are sold in the market as their maturity date approaches. This process occurs as the market price of these securities moves closer to their par value, which is the amount paid back to the bondholder at maturity. Understanding this concept is essential for investors and financial professionals as it impacts investment strategies and market behavior.
Legal Use & context
This term is primarily used in finance and investment law, particularly in the context of securities regulation. It is relevant for individuals and entities involved in the buying and selling of bonds and other fixed-income securities. Legal professionals may encounter this term when advising clients on investment strategies, compliance with securities laws, or when drafting legal documents related to bond transactions. Users can manage some aspects of these transactions themselves using legal templates available through US Legal Forms.
Real-world examples
Here are a couple of examples of abatement:
For instance, consider a government bond that was initially sold at a premium of $1,100. As the bond approaches its maturity date, its market price may gradually decline to $1,000, its par value. This reflects the wearing away of the premium as the bond nears maturity.
(Hypothetical example): A corporate bond issued at a premium of $1,050 may see its price decrease to $1,020 as the maturity date approaches, illustrating the same concept.