What is a Premium?
Definition of Premium: This has different meanings depending on the asset vehicle that offers the background for the expression. In the trading market, a premium is similar to the amount according to which the future or forward cost crosses the spot cost. It can also be referred as the total price of a choice. As an option does not have any intrinsic value, the value depends on the value of an original asset. If the choice is “In the Currency”, the appreciation value lessens the premium. If there are no possibilities of profit, during the expiration of the option, the loss gets limited to the total quantity of premium. As far as bonds are concerned, the premium indicates the dissimilarity between high cost paid for the bond and face amount of the bond. A bond alters the face value of the trading market because of the alterations in the existing rate of interest. A bond increases the value if the rates of interest falls and the value fall when the rates of interest rise. In several cases, the investors misinterpret the property of bonds as the bonds are referred as “fixed income securities.”