Define: Premium

UK Accounting Glossary

Definition: Premium


Quick Summary of Premium


An amount paid in addition, or extra.



What is the dictionary definition of Premium?

Dictionary Definition


  1. A prize or award.
  2. Something offered at a reduced price as an inducement to buy something else.
  3. A bonus paid in addition to normal payments.

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Full Definition of Premium


In options trading, the premium is the total price of an option. The premium is the compensation an option writer receives for assuming the risk of writing the option. From the buyer’s perspective, the premium is the cost for holding the right to buy or sell the underlying asset to the writer. If the option is exercised, the premium offsets the writer’s losses. On the other hand, if the option is not exercised, the premium is the writer’s profit. A premium is calculated by adding the intrinsic value of the option to its time value. The intrinsic value component of the premium is the amount by which the option is in-the-money. The time value component of the premium is chiefly determined by the amount of time left until the option expires – along with the volatility and dividends of the underlying security as well as the current risk-free interest rate (i.e. T-bill rate).


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Examples of Premium in a sentence


If you don’t pay your premiums on time, your policy will lapse.
It may be more convenient for companies to pay their premiums annually, and simplify their monthly budgeting process.



Cite Term


To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.

Page URL
https://payrollheaven.com/define/premium/
Modern Language Association (MLA):
Premium. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. April 03, 2020 https://payrollheaven.com/define/premium/.
Chicago Manual of Style (CMS):
Premium. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. https://payrollheaven.com/define/premium/ (accessed: April 03, 2020).
American Psychological Association (APA):
Premium. PayrollHeaven.com. Retrieved April 03, 2020, from PayrollHeaven.com website: https://payrollheaven.com/define/premium/

Definition Sources


Definitions for Premium are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 23rd December 2018.