premium

Examples of premium in the following topics:

• Premiums

  • Premiums are prizes, gifts, or other special offers consumer receive when purchasing products.
  • Another form of consumer sales promotion is the premium.
  • 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.
  • In-or On-package Premiums are usually small gifts, such as toys in cereal boxes.

• The "Bond Yield Plus Risk Premium" Approach

  • The risk premium on its equity is 4%.
  • The normal historical equity risk premium for all equities has been just over 6%.
  • In general, an equity's risk premium will be between 5% and 7%.
  • Common methods for estimating the equity risk premium include:
  • Describe the process for the bond yield plus risk premium approach

• 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.

• Bonds Issued at a Premium

  • This would make the amortization rate of the bond's premium equal to $1,000 per year.
  • When the business pays interest, it must also amortize the bond premium at that time.
  • 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.
  • This would make the amortization rate of the bond's premium equal to $1,000 per year.

• 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.
  • Actual interest rates (without factoring in inflation) are viewed by economists and investors as being the nominal (stated) interest rate minus the inflation premium.
  • In the Fisher equation, π is the inflation premium.

• Amortized Cost Method

  • The accounting records show the debt at the amortized cost (face amount plus premium/less discount) and the difference between the maturity value and the cost of the bonds is amortized to the income statement over the life of the bonds.
  • The first interest payment is $1,600, but since the company paid a premium, the effective interest earned is $1,302 (net the amortization of the premium).

• The Cost of Common Equity

  • -- Expected return for a security equals the risk-free return for the market plus the beta for the security times its risk premium.
  • The CAPM shows that the cost of equity is equal to the risk free rate plus a premium expected for risk.
  • This premium is sensitized to movements in relevant markets using the beta coefficient.
  • Another approach to calculating the cost of common stock is to add a risk premium to the cost of debt.
  • Expected return for a security equals the risk-free return for the market plus the beta for the security times its risk premium.

• The Term Structure

  • The expectation hypothesis of the term structure of interest rates is the proposition that the long-term rate is determined by the market's expectation for the short-term rate plus a constant risk premium.
  • This is called the term premium or the liquidity premium.
  • This premium compensates investors for the added risk of having their money tied up for a longer period, including the greater price uncertainty.
  • Because of the term premium, long-term bond yields tend to be higher than short-term yields, and the yield curve slopes upward.
  • Long-term yields are also higher not just because of the liquidity premium, but also because of the risk premium added by the risk of default from holding a security over the long-term.

• The Savings Association Insurance Fund (SAIF)

  • In the 1990s, SAIF premiums were, at one point, five times higher than BIF premiums; several banks attempted to qualify for the BIF, with some merging with institutions qualified for the BIF to avoid the higher premiums of the SAIF.
  • This drove up the BIF premiums as well, resulting in a situation where both funds were charging higher premiums than necessary.
  • In the 1990s, SAIF premiums were, at one point, five times higher than BIF premiums.
  • The FDIC maintains the DIF by assessing depository institutions an insurance premium.

• Options Contract

  • Option holders must pay a fee, called the option premium.
  • 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.
  • However, the company has paid the $10,000 premium.
  • Speculators would earn a loss, equaling the option's premium.