Definition of premium

1. excess of the amount received over the par or face value of a security. For example, if a $1000 bond is issued at 102, the premium on the bond is $20 ($1000 x 2%).
2. price paid for a contract.
3. periodic payment made on an insurance policy.
4. promotion item given away in a marketing effort.
5. excess paid over a typical expense item, such as a bonus above employee's regular salary.
6. extra payment made for incentive purposes.
7. price a call or put buyer pays to the writer (seller) for an option contract.
8. amount in excess of market value paid in a tender offer.

1. Banking. A noncash incentive offered customers opening a savings account or taking out a loan.
2. Finance difference between the face value of a bond and the above par price. The opposite is discount. Bonds purchased at a premium are amortized over their expected life; if purchased at a discount, their book value is said to accrete or grow towards par from the date purchased. See also accretion of discount.
3. Foreign exchangeexchange situation, called AGIO, in which gold or silver coins have a higher exchange value than paper currency of equivalent face value.
4. Insurance. An annual, semiannual, or other payment for insurance coverage.
5. Options. The price paid by the buyer of an option contract.

amount that an insured is charged, reflecting an expectation of loss or risk. The insurance company will assume the risks of the insured (length of life, state of health, property damage or destruction, or liability exposure) in exchange for a premium payment.

In general: extra payment usually made as an incentive.
Bonds:

1. amount by which a bond sells above its face ( PAR) value. For instance, a bond with a face value of $1,000 would sell for a $100 premium when it cost $1,100. The same meaning also applies to preferred stock. See also premium bond; premium over bond value; premium over conversion value.
2. amount by which the redemption price to the issuer exceeds the face value when a bond is called. See also call premium.

1. charge occasionally paid by a short seller when stock is borrowed to make delivery on a short sale.
2. amount by which a stock's price exceeds that of other stocks to which it is comparable. For instance, securities analysts might say that XYZ Foods is selling at a 15% premium to other food company stocks-an indication that the stock is more highly valued by investors than its industry peers. It does not necessarily mean that the stock is overpriced, however. Indeed, it may indicate that the investment public has only begun to recognize the stock's market potential and that the price will continue to rise. Similarly, analysts might say that the food industry is selling for a 20% premium to Standard & Poor's 500 index, indicating the relative price strength of the industry group to the stock market as a whole.
3. in new issues, amount by which the trading price of the shares exceeds the offering price.
4. amount over market value paid in a tender offer. See also premium raid.

rate that an insured is charged, reflecting his or her expectation of loss or risk. The insurance company will assume the risks of the insured (length of life, state of health, property damage or destruction, or liability exposure) in exchange for a premium payment. Premiums are calculated by combining expectation of loss and expense and profit loadings. Usually, the periodic cost of insurance is computed by multiplying the premium rate per unit of insurance by the number of units purchased. The rate class in which the insured is placed includes large numbers of individuals with like characteristics who pose the same risk. Every individual in a given class will not incur the same loss; rather each has approximately the same expectation of loss (known as the Principle of Equity).

1. special item, bonus, or award offered free or at a nominal price as an incentive to induce a target market to purchase or obtain for trial a product or service. Advertisers use premiums to attract consumers who would not normally buy a product or service, or to encourage more frequent buying by those already buying the product. In addition, premiums are used to introduce new products, provide extra appeal in special sales events, meet competitive prices, provide copy appeal, promote larger size units, and excite a company's sales force. Newspapers, magazines, radio broadcasts, packages, store displays, outdoor advertising, direct-mail, and package inserts are frequently used to promote premiums. An advertiser who elects to charge for a premium may offer an $8 can opener to its target group for $1 plus 10 box tops of the product. On the other hand, an advertiser may elect to offer the can opener free with 10 proofs of purchases. In both examples, the advertiser has used the premium to boost sales. When premiums are used as an incentive to try a product, such as a magazine, it is important that the premium selected be attractive enough to get qualified prospects to respond, but not so desirable that consumers are more interested in the gifts than the product being sold. In fact, many advertisers believe that the most effective premium is the one that is closely related to the type of product offered. For example, a baby food manufacturer may offer a rattle as a premium with the purchase of baby food. It is also felt that the premium should be visually appealing and, if possible, serve as a constant, favorable reminder of the promoted product, since the more often the premium is used, the more often the customer is reminded of the product. For example, advertisers frequently imprint their name on their premium to reinforce the relationship between themselves and the premium. See also Promotion Marketing Association of America.
2. higher charge paid for a product, service, or special advertising request. For example, advertisers who want to assure that their advertisement will receive maximum impact will pay a premium price for a preferred position, such as page 3 of a publication. In addition, advertisers with deadlines to meet will pay a premium to get their production completed in a short period of time. Also called premium price.
3. highest-priced product or service in the competitive marketplace. Premium products have recently assumed an important market niche. For example, marketers have found that some consumers are willing to pay a premium price to purchase a quality product for items such as ice cream, cookies, and upscale food specialties.

1. the cost of an insurance policy.
   Example: Annual or monthly premiums are generally required for hazard insurance, liability insurance, and life insurance. title insurance premiums are paid only once.

2. the value of a mortgage or bond in excess of its face amount.
   Example: When the face rate of a mortgage exceeds the prevailing market interest rate, the mortgage may be worth a premium over its face value.

3. an amount over market value paid for some exceptional quality or feature.
   Example: Pembleton paid a premium for the house with an excellent view of the lake.