Premium

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DEFINITION of '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.

BREAKING DOWN 'Premium'

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.

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