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Finance Dictionary and Glossary of Investment Terms
(1) A bond sold above its par value. (2) The price of an option contract; also, in futures trading, the amount by which the futures price exceeds the price of the spot commodity. For convertibles, amount by which the price of a convertible exceeds parity, and is usually expressed as a percentage. If a stock is trading at $45, and the bond convertible at $50 is trading at 105, the premium is $15, or 16.66% (15/90). If the premium is high, the bond trades like any fixed income bond; if low, like a stock. See: Gross parity, net parity. For futures, excess of fair value of future over the spot index, which in theory will equal the Treasury bill yield for the period to expiration minus the expected dividend yield until the future's expiration. For options, price of an option in the open market (sometimes refers to the portion of the price that exceeds parity). For straight equity, price higher than that of the last sale or inside market. Related: Inverted market premium payback period. Also called break-even time; the time it takes to recover the premium per share of a convertible security.
The price paid by a buyer to a seller of an option quoted on a per-share basis. The premium will usually exceed the intrinsic value of the option because of its time value.
1. The total cost of an option. 2. The difference between the higher price paid for a security and the security's face amount at issue.