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Premium

(1) A bond sold above its par value. (2) The price of an option contract; also, in futures trading, the amount by which the futures price exceeds the price of the spot commodity. (3) For convertibles, amount by which the price of a convertible exceeds parity, and is usually expressed as a percentage. Suppose a stock is trading at $45, and the bond is convertible at a $50 stock price and the convertible bond trading at 105. A similar bond without the conversion feature trades at $90. In this case, the premium is $15, or 16.66%=(105-90)/90. If the premium is high, the bond trades like any fixed income bond; if low, like a stock. See: Gross parity, net parity. (4) For futures, excess of fair value of future over the spot index, which in theory will equal the Treasury bill yield for the period to expiration minus the expected dividend yield until the future's expiration. (5) For options, price of an option in the open market (sometimes refers to the portion of the price that exceeds parity). (6) For straight equity, price higher than that of the last sale or inside market. Related: Inverted market premium payback period. Also called break-even time; the time it takes to recover the premium per share of a convertible security.

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Premium

1. The price by which a security, especially but not necessarily a bond, exceeds its face value.

2. The price of an option contract.

3. A payment that a policyholder makes, usually monthly, in order to be covered by an insurance policy.

4. The extra return that an investor expects to make from a position in exchange for accepting extra risk.

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premium

1. The price at which an option trades. The size of the premium is affected by various factors including the time to expiration, interest rates, strike price, and the price and price volatility of the underlying asset. Also called option premium.

2. The amount by which a bond sells above its face value.

3. The excess by which a warrant trades above its theoretical value.

4. The amount by which a convertible bond sells above the price at which the same bond without the convertible feature would sell.

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Premium. A premium is the purchase price of an insurance policy or an annuity contract. You may pay the premium as a single lump sum, in regular monthly or quarterly installments, or in some cases on a flexible schedule over the term of the policy or contract.

When you pay over time, the premium may be fixed for the life of the policy, assuming the coverage remains the same. That's the case with many permanent life insurance policies.

With other types of coverage, the premium changes as you grow older or as costs for the issuing company increase.

Used in another sense, the term premium refers to the amount above face value that you pay to buy, or you receive from selling, an investment. For example, a corporate bond with a par value of $1,000 with a market price of $1,050 is selling at a $50 premium.

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premium

(1) An amount paid for an insurance policy.(2) An advance payment of several months or even years of rent to a landlord.(3) The value of a mortgage in excess of its face value.For example,if a $100,000 mortgage cannot be prepaid and is bearing interest at 10 percent when prevailing interest rates are only 6 percent, an investor might pay more than $100,000 to buy the mortgage because of the high return.

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Premium

What Does Premium Mean?

(1) The market price of an option contract. (2) The difference between the higher price paid for a fixed-income security and the security's face amount at issue (par value). (3) The specified amount of payment required periodically by an insurer to provide coverage under a specific insurance plan for a defined period. The premium is paid by the insured party to the insurer and primarily compensates the insurer for bearing the risk of a payout if the insurance agreement's coverage is required.

Investopedia explains Premium

(1) The premium of an option is basically the sum of that option's intrinsic value and time value. It is important to note that volatility also affects the premium. (2) If a fixed-income security (bond) is purchased at a premium, existing interest rates are lower than the coupon rate. Investors pay a premium for an investment that will return an amount greater than existing interest rates. (3) A common example of an insurance premium is auto insurance. A vehicle owner can insure the value of his or her vehicle against loss resulting from an accident, theft, and other potential problems. The owner usually pays a fixed premium amount in exchange for the insurance company's guarantee to cover any economic losses incurred under the scope of the agreement.

Related Terms:
• Coupon
• Intrinsic Value
• Market Risk Premium
• Option
• Time Value of Money