I have trouble understanding why this is. Can anyone explain? Thanks!
Any difference between the fair value and par value of the security is amortized over its term.
When the par value exceeds fair value, the securities trade at a discount. This occurs when the effective interest rate is greater than the stated interest (coupon) rate.
When the par value is lower than fair value, the securities trade at a premium. This occurs when the effective interest rate is lower than the stated interest (coupon) rate.