Premium

What Is a Premium?

Premium has several meanings in finance. Most commonly, it alludes to:

1. Generically, a security trading over its intrinsic or hypothetical value is trading at a premium (as opposed to a discount). The difference between the price paid for a fixed-income security and the security's face amount at issue is alluded to as a premium assuming that price is higher than par.
2. The purchase price of an insurance policy or the standard payments required by an insurer to give coverage to a defined period of time.
3. The total cost to buy a option contract (frequently inseparable from its market price).

Grasping a Premium

Overall, premium is a price paid for far in excess of some essential or intrinsic value. Relatedly, it is the price paid for protection from a loss, hazard, or damage (e.g., insurance or options contracts). "Premium" is derived from the Latin praemium, where it meant "award" or "prize."

Types of Premium

Price Premium

A price that exists over some kind of fundamental value is alluded to as a premium, and such assets or items are supposed to exchange at a premium. Assets might trade at a premium due to increased demand, limited supply, or perceptions of increased value from now on.

A premium bond is a bond trading over its face value or all in all; it costs more than the face amount on the bond. A bond could trade at a premium in light of the fact that its interest rate is higher than current rates in the market.

The concept of a bond price premium is connected with the principle that the price of a bond is contrarily connected with interest rates; on the off chance that a fixed-income security is purchased at a premium, this means that then-current interest rates are lower than the coupon rate of the bond. The investor hence pays a premium for an investment that will return an amount greater than existing interest rates.

A risk premium includes returns on an asset that are expected to be in excess of the risk-free rate of return. An asset's risk premium is a form of compensation for investors. It addresses payment to investors for enduring the extra risk in a given investment over that of a risk-free asset.

Likewise, the equity risk premium alludes to an excess return that investing in the stock market gives over a risk-free rate. This excess return repays investors for facing the generally higher risk challenges equity investing. The size of the premium changes and relies upon the level of risk in a particular portfolio. It likewise changes over the long run as market risk vacillates.

Options Premium

Premiums for options are the cost to buy an option. Options give the holder (owner) the right however not the obligation to buy or sell the underlying financial instrument at a predetermined strike price. The premium for a bond reflects changes in interest rates or risk profile since the issuance date. The buyer of an option has the right yet not the obligation to buy (call) or sell (put) the underlying instrument at a given strike price for a given period of time.

The premium that is paid is its intrinsic value plus its time value; an option with a more drawn out maturity generally costs more than a similar structure with a more limited maturity. The volatility of the market and how close the strike price is to the then-current market price additionally influence the premium.

Sophisticated investors now and again sell one option (otherwise called composing an option) and utilize the premium received to cover the cost of buying the underlying instrument or another option. Buying numerous options can either increase or reduce the risk profile of the position, contingent upon the way things are structured.

Insurance Premium

Premiums for insurance incorporate the compensation the insurer gets for bearing the risk of a payout should an event happen that triggers coverage. The premium may likewise contain a sales specialist's or alternately dealer's commissions. The most common types of coverage are auto, wellbeing, and homeowners insurance.

Installments are paid for some types of insurance, including wellbeing, homeowners, and rental insurance. A common illustration of a insurance premium comes from [auto insurance](/collision protection). A vehicle owner can protect the value of their vehicle against loss coming about because of accident, theft, fire, and other expected issues.

The owner ordinarily pays a fixed premium amount in exchange for the insurance organization's guarantee to cover any economic losses incurred under the scope of the agreement. Premiums depend on both the risk associated with the insured and the amount of coverage wanted.

Premium FAQs

What Does Paying a Premium Mean?

To pay a premium generally means to pay over the going rate for something, due to a perceived added value or due to supply and demand uneven characters. To pay a premium may likewise allude all the more barely to making payments for an insurance policy or options contract.

What Is Another Word for Premium?

Equivalent words for "premium" incorporate prize, fee, dividend, or bonus. In insurance and options trading, it very well might be inseparable from "price."

What Are Premium Pricing Examples?

Premium pricing is a marketing strategy that includes tactically setting the price of a particular product higher than either a more essential rendition of that product or versus the competition. The purpose of premium pricing is to convey higher quality or allure than different options.

Features

• A bond could trade at a premium in light of the fact that its interest rate is higher than the current market interest rates.
• Premium can mean a number of things in finance — including the cost to buy an insurance policy or an option.
• Individuals might pay a premium for certain in-demand things.
• Something trading at a premium could likewise signal it is over-valued.
• Premium is likewise the price of a bond or other security over its issuance price or intrinsic value.