Price premium

(noun)

The percentage by which a product's selling price exceeds a benchmark price.

Related Terms

Examples of Price premium in the following topics:

  • Demanding a Premium

    • Firms can engage in premium pricing by keeping the price of their good artificially higher than the benchmark price.
    • Brands like Pepsi or Coke can price their goods at a premium, charging more than a generic soda brand due to its brand name.
    • Premium pricing is the practice of keeping the price of a product or service artificially high in order to encourage favorable perceptions among buyers, based solely on the price.
    • A premium pricing strategy involves setting the price of a product higher than similar products .
    • Luxury has a psychological association with price premium pricing.

  • Analysis of Price Discrimination

    • Second degree price discrimination: the price of a good or service varies according to the quantity demanded.
    • By using price discrimination, the seller makes more revenue, even off of the price sensitive consumers.
    • Premium pricing: uses price discrimination to price products higher than the marginal cost of production.
    • Regular coffee is priced at $1 while premium coffee is $2.50.
    • Gender based prices: uses price discrimination based on gender.

  • Premiums

    • Another form of consumer sales promotion is the premium.
    • When a company presents a premium, the consumer pays full price for the good or service, as opposed to coupons that grant price reductions or to samples, instead of receiving the actually product.
    • In the United States, each year over $4.5 billion is spent on premiums.
    • Premiums fall into one of two categories: free premiums which only require the purchase of the product and self-liquidating premiums which require consumers to pay all, or some, of the price of the premium.
    • The marketing objectives of this type of premium is to attract more customers with low prices.

  • Options Contract

    • If the spot market price rises, subsequently, the option's premium for a European call option increases while the premium decreases for the put option.
    • If the strike price increases, then the option's premium for a European call option decreases while the premium increases for a put option.
    • Therefore, the option premium for Asset A is greater because the large swings in the price boosts the likelihood the investor exercises the option.
    • Thus, Option A has a larger option premium because investors experience more uncertainty in its asset's prices.
    • Example 2: Strike price for a European put option is $40 per ton of corn, and the premium equals $0.07 per ton.

  • Chapter Questions

    • A company buys 10 contracts for petroleum that specifies a price of $75 per barrel.
    • Option premium equals $0.5 per barrel, and each contract specified a quantity of 1,000 barrels.
    • Compute the premium, and whether you will exercise this option if the market price is $50 per barrel?
    • Strike price of corn equals $5 per bushel; the option premium is $0.01 per bushel, and each contract specified a quantity of 100 bushels.
    • Calculate the farmer's premium, and whether he will exercise this option if the market price of corn equals $6 per bushel?

  • The "Bond Yield Plus Risk Premium" Approach

    • The risk premium on its equity is 4%.
    • In the BYPRP approach, we use a bond's yield to maturity, which is the discount rate at which the sum of all future cash flows from the bond (coupon payments and principal payments) are equal to the price of the bond.
    • Common methods for estimating the equity risk premium include:
    • The Fed Model (forward operating earnings yield [earnings per share divided by share price] minus the 10-year U.S.
    • We can only utilize the BYPRP approach if the entity has publicly traded debt, and it does not produce as accurate an estimate as the capital asset pricing model or discounted cash flow analysis.

  • Bonds Issued at a Premium

    • When a bond is sold at a premium, the difference between the sales price and face value of the bond must be amortized over the bond's term.
    • This would make the amortization rate of the bond's premium equal to $1,000 per year.
    • Like with a bond that is sold at a discount, the difference between the bond's face value and sales price must be amortized over the term of the bond.
    • To calculate the amortization rate of the bond premium, a company generally divides the bond premium amount by the number of interest payments that will be made during the term of the bond.
    • The company must debit the bond premium account by the amortization rate.

  • Inflation Premium

    • An inflation premium is the part of prevailing interest rates that results from lenders compensating for expected inflation.
    • An inflation premium is the part of prevailing interest rates that results from lenders compensating for expected inflation by pushing nominal interest rates to higher levels.
    • The inflation premium will compensate for the third risk, so investors seek this premium to compensate for the erosion in the value of their capital, due to inflation.
    • In the Fisher equation, π is the inflation premium.
    • For example, if an investor were able to lock in a 5% interest rate for the coming year and anticipates a 2% rise in prices, he would expect to earn a real interest rate of 3%. 2% is the inflation premium.

  • New Product

    • What price level should be set in such cases?
    • Penetration pricing in the introductory stage of a new product's life cycle involves accepting a lower profit margin and pricing relatively low.
    • Price is set relatively high to generate a high profit margin, and sales are limited to those buyers willing to pay a premium to get the new product.
    • A premium product generally supports a skimming strategy.
    • In this case, "premium" doesn't just denote high cost of production and materials, it also suggests that the product may be rare or that the demand is unusually high.

  • Default Risk and Bond Price

    • Thus, these differences cause interest rates and bond prices to differ among these different securities.
    • Risk premium is always positive.
    • Did you notice the government bonds have a higher bond price while corporate bonds have a lower bond price?
    • As the default risk increases, then the risk premium increases too.
    • Impact of a risk premium on the bond markets