Premium
1. The total cost of an option.
2. The difference between the higher price paid for a fixed-income security and the security's face amount at issue.
3. The specified amount of payment required periodically by an insurer to provide coverage under a given insurance plan for a defined period of time. The premium is paid by the insured party to the insurer, and primarily compensates the insurer for bearing the risk of a payout should the insurance agreement's coverage be required. Investopedia Says:
1. The premium of an option is basically the sum of the option's intrinsic 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 comes from auto insurance. A vehicle owner can insure the value of his or her vehicle against loss resulting from 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:
Actuarial Risk
Coupon
Discount
Equity Risk Premium
Face Value
Insurance
Intrinsic Value
Option
Time Value
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