what is a premium 
premium has several meanings in finance most commonly it refers to understanding a premiumbroadly speaking a premium is a price paid for above and beyond some basic or intrinsic value relatedly it is the price paid for protection from a loss hazard or harm e g insurance or options contracts the word premium is derived from the latin praemium where it meant reward or prize types of premiuma price that exists above some sort of fundamental value is referred to as a premium and such assets or objects are said to be trading at a premium assets may trade at a premium due to increased demand limited supply or perceptions of increased value in the future a premium bond is a bond trading above its face value or in other words it costs more than the face amount on the bond a bond might trade at a premium because its interest rate is higher than current rates in the market the concept of a bond price premium is related to the principle that the price of a bond is inversely related to interest rates if 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 thus pays a premium for an investment that will return an amount greater than existing interest rates 1a risk premium involves 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 represents payment to investors for tolerating the extra risk in a given investment over that of a risk free asset similarly the equity risk premium refers to an excess return that investing in the stock market provides over a risk free rate this excess return compensates investors for taking on the relatively higher risk of equity investing the size of the premium varies and depends on the level of risk in a particular portfolio it also changes over time as market risk fluctuates premiums for options are the cost to buy an option options give the holder owner the right but not the obligation to buy or sell the underlying financial instrument at a specified 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 but not the obligation to buy call or sell put the underlying instrument at a given strike price for a given period of time 2the premium that is paid is its intrinsic value plus its time value 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 affect the premium 3sophisticated investors sometimes sell one 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 either increase or reduce the risk profile of the position depending on how it is structured premiums for insurance include the compensation the insurer receives for bearing the risk of a payout should an event occur that triggers coverage the premium may also contain a sales agent s or broker s commissions the most common types of coverage are auto health and homeowners insurance premiums are paid for many types of insurance including health homeowners and rental insurance these payments must be submitted on a regular mode or schedule to continue a policy a common example of an insurance premium comes from auto insurance a vehicle owner can insure the value of their vehicle against loss resulting from accident theft fire 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 premiums are based on both the risk associated with the insured and the amount of coverage desired premium faqsto pay a premium generally means to pay above the going rate for something because of some perceived added value or due to supply and demand imbalances to pay a premium may also refer more narrowly to making payments for an insurance policy or options contract synonyms for premium include prize fee dividend or bonus in insurance and options trading it may be synonymous with price premium pricing is a marketing strategy that involves tactically setting the price of a particular product higher than either a more basic version of that product or versus the competition the purpose of premium pricing is to convey higher quality or desirability than other options 