The amount by which the price of a warrant exceeds the value of its underlying stock. A warrant is a document attached to a security giving the holder the right to buy more shares of the same security at a certain price on a certain date. If, for example, a warrant allows one to buy 10 shares at $5 each (for a total of $50) but the warrant is trading at $60, the warrant premium is $10. The warrant premium usually declines as the warrant approaches its expiration date.
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The excess of a warrant's market price over its minimum value in exchange for shares of common stock. For example, a warrant to purchase 3 shares of stock at $10 each has a minimum value of $45 if the shares trade at a price of $25 (3 × [$25 - $10]). If the warrant has a market price of $55, the premium will be equal to $10 ($55 - $45). Although a warrant usually trades at a premium, the size of the premium declines as its price climbs and as it approaches expiration.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.