In finance and accounting, a premium is any additional cost charged on top of an asset’s usual cost.
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The concept of a premium is usually used in the context of bonds and stocks to refer to the difference between the stock or bond’s par value and the value it actually sells for.
Premium on stock
A premium on shares or stock – also known as stock premium or capital surplus – occurs when a stock or share is issued above its par value. The difference between the par value and the issuing value is considered the stock premium. For example, if a stock has a par value of £10 but is issued for £50, the share has a premium of £40.
Stock premium represents the amount that investors are willing to pay over par value, and therefore reflects the market value of the stock.
In the UK, stock may be issued at a premium (above par), but can not be issued at a discount (below par).
Accounting for premium on stock
When accounting for stock premiums, the par value of the stock should be recorded in the common stock account. The premium is then recorded in an equity account called ‘Additional Paid-in Capital’, ‘Paid-In Capital In Excess of Par’, or something similar. This account appears on the balance sheet under stockholders’ equity
Premium on bonds
A premium on a bond occurs when a bond is sold for more than its par value. To calculate the premium of a bond, subtract the par value from the issuing price.
Bonds can be issued above or below their par value due to changing interest rates. Investors pay a premium on a bond in order to receive higher interest payments over the bond’s lifetime.
Accounting for premium on bonds
Accounting for bonds involves several steps throughout the bond’s lifetime. If an investor purchases a bond at a premium, the difference between the par value and the issuing value should be recorded in account called ‘Premium on Bonds Payable’
When a bond is issued at a discount or a premium, amortisation should be applied throughout the bond’s lifetime.
Premium Bonds in the UK
When talking about premiums in relations to bonds, it is important to make a distinction between bonds issued at a premium and Premium Bonds. In the UK, ‘Premium Bond’ refers to a specific type of bond issued by NS&I.
Whereas regular bonds earn interest, when someone invests in Premium Bonds, they are entered into a monthly prize draw. The prizes range from £25 to £1 million. Between £100 (or £50 for existing holders) and £50,000 can be invested in Premium Bonds at one time, and every pound invested is equal to one entry.
Premium Bonds are not eligible for Capital Gains Tax or Income Tax, so are a commonly used by people looking for tax-free investments. On the other hand, Premium Bonds do not guarantee a Return on Investment, so might not be a good investment option for anyone looking for guaranteed returns.
Premiums and Debitoor
With Debitoor accounting & invoicing software, it’s easy to keep track of your investments. Our financial reporting functions automatically generate balance sheets to give you an overview of your accounts.
FAQs
Premium can mean a number of things in finance—including the cost to buy an insurance policy or an option. Premium is also the price of a bond or other security above its issuance price or intrinsic value. A bond might trade at a premium because its interest rate is higher than the current market interest rates.
How do you solve for premium? ›
To calculate premium due, multiply the benefit amount by the premium rate set forth in your policy. Be sure to apply salary definitions, benefit maximums, rounding rules, age reductions, guarantee issue limits, and spouse coverage limitation or restrictions.
What is a premium Quizlet? ›
premium. the rate that an insured is charged; fee paid for insurance/rate charged.
What does your premium mean? ›
The amount you pay for your health insurance every month. In addition to your premium, you usually have to pay other costs for your health care, including a deductible, copayments, and coinsurance.
What is a premium everfi? ›
Premium. The amount you pay the insurance company for coverage, typically paid each month.
What does as a premium mean? ›
Idioms and Phrases
At a higher price than usual owing to scarcity; also, considered more valuable, held in high esteem. For example, Since that article came out, the firm's stock has been selling at a premium and Space is at a premium in most stores .
What is the formula for premium? ›
The premium rate is calculated by dividing the sum insured by the sum assured. This means that if you have a sum insured of Rs 10,000 and a sum assured of Rs 1,000 then your premium rate would be 10%. Calculating the insurance premium rate is a crucial step in the process of purchasing insurance.
What are premiums best described as? ›
Premiums are best described as. money paid by the insured to acquire a policy's benefits.
How do you calculate premium price? ›
The higher the volatility of the underlying asset, the higher the option premium. The formula for calculating the option premium is as follows: Option premium = Intrinsic value + Time value + Volatility value.
Is a premium a payment? ›
A premium is the amount of money that an insurance policyholder pays to the insurer in exchange for coverage. There are several different modes of premium payment. The most common payment modes are monthly, quarterly, semi-annual, and annual. Out of all of these, monthly is the most common.
Insurance is crucial for protecting individuals from financial loss in unpredictable events. Insurance can protect against losing money due to unforeseen circ*mstances. Purchasing insurance is important to prevent financial burden in case of accidents or theft.
How much does Quizlet premium cost? ›
Quizlet Plus vs Quizlet Teacher Plus Pricing
| Payment Plan | Quizlet Plus | Quizlet Teacher Plus |
|---|
| Monthly | $7.99 | $15.99 |
| Annually | $35.99 | $69.99 |
Mar 17, 2023
An example of a premium that most of us are familiar with is the type of premium that you pay for insurance coverage. Let's say you've just signed up for car insurance. In exchange for insurance coverage, your insurance company will require that you make a monthly payment — That monthly payment is called a premium.
What defines premium? ›
: a sum over and above a regular price paid chiefly as an inducement or incentive. c. : a sum in advance of or in addition to the nominal value of something. bonds callable at a premium of six percent.
What makes up a premium? ›
Insurers rely on a range of information such actual, forecast and statistics to help them calculate a premium they want to charge for accepting a particular risk. Every risk is different and can incorporate different rating factors which affect the premium. A premium is also determined by the level of cover you choose.
What does it mean if someone calls you premium? ›
: of exceptional quality or amount. also : higher-priced.
What is an example of a premium? ›
premium noun [C] (EXTRA)
something extra given or an extra amount charged: You get a lipstick as a premium with the purchase of this makeup. Our customers are willing to pay a premium for a superior product. If you get something at a premium, you pay a high price for it, esp.
What is a premium statement? ›
The premium statement therefore regulates your accounting situation in line with the changes made to your policy and what you have already paid. It can be either a bill or a refund (credit note).
What is the meaning of premium term? ›
The premium payment term in insurance refers to the duration or period during which the policyholder is required to make premium payments for their insurance policy. It specifies the timeframe over which the premiums are to be paid to keep the policy in force and active.
