What Does Premium Mean In Financial Terms?

Insurance Premium

What Is A Premium?

In Finance, Premium Has Several Meanings:

  • It Is The Total Cost Of Buying An Option, Which Entitles The Holder But Not The Obligation To Buy Or Sell The Underlying Financial Instrument At A Specified Strike Price.
  • It Is The Difference Between The Premium Paid For A Certain- Income Security And The Principal Amount Of The Security At Issue, Reflecting Changes In Interest Rates Or The Risk Profile From The Date Of Issue.
  • It Is A Fixed Amount Of Payments Required Periodically By An Insurer To Provide Coverage Under A Given Plan For A Specified Period Of Time. The Premium Compensates The Insurer For Bearing The Risk Of Payment If An Event Occurs That Triggers The Coverage. The Most Common Types Of Coverage Are Auto, Health, And Home Insurance.
Insurance Premium
Insurance Premium

Details About Premium

All Three Uses Of The Term Premium Involve Payment For Something That Is Perceived To Be Of Value.

Option Premium

An Option Has The Buyer’s Right But Not The Obligation To Buy (With A Call) Or Sell The Underlying Instrument (With A Put) At A Given Strike Price For A Specified Period Of Time. The Underlying Value Plus The Time Value Of The Premium Paid ; An Option With A Longer Maturity Always Costs More Than The Same Structure With A Shorter Maturity. The Volatility Of The Market And How Close The Strike Price Is To The Then Current Market Price Also Affects The Premium.

Also Read – Insurance While Saving: Know About Its Different Categories

Sophisticated Investors Sometimes Sell An Option (Also Known As Writing An Option) And Use The Premium Received To Cover The Cost Of Buying The Underlying Instrument Or Another Option. Buying Multiple Options Can Increase Or Decrease The Risk Profile Of A Position Depending On How It Is Structured.

Bond Price Premium

The Concept Of A Bond Price Premium Is Directly Related To The Principle That A Bond’s Price Is Inversely Related To Interest Rates; If A Fixed-income Security Is Purchased At A Premium, It Means That The Bond’s Coupon Rate Is Lower Than Current Interest Rates. The Investor Thus Pays A Premium For An Investment That Will Return More Than Prevailing Interest Rates.

Also Read – What is insurance? – Life insurance: General Insurance

Insurance Premium

Premiums Are Paid For Many Types Of Insurance, Including Health Insurance , Homeowner’s And Renter’s Insurance. A Common Example Of An Insurance Premium Comes From Auto Insurance . A Car Owner Can Insure The Value Of His Car Against Loss Due To Accidents, Theft, Fire And Other Possible Problems. The Owner Usually Pays A Fixed Premium Amount in Return For The Insurance Company’s Guarantee to Cover Any Economic Loss Under The Scope Of The Contract.

Premiums Are Based On Both The Risk Associated With The Insured And The

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