At a Premium – Definition

Cite this article as:"At a Premium – Definition," in The Business Professor, updated September 14, 2019, last accessed September 26, 2020, https://thebusinessprofessor.com/lesson/at-a-premium-definition/.

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At A Premium Definition

‘At a premium’ is a term that describes a condition in which an item has a higher price because it is valuable, many people want it, but it is scarce. In asset valuation “at a premium” describes a situation where the current value of an asset is more than its intrinsic or fundamental value. An item or asset that is ‘at a premium’ is its value is in excess, therefore, it is held in high estemm by individuals.

A Little More on What is At A Premium

Here are situations that clearly depicts the phrase “at a premium”;

  • A callable bond that is trading at a premium to its par value means it has additional value which is above its face value.
  • If share of Company XYZ are trading at a premium to the shares of Company ABC, it means the shares of the former company have excess value when compared to the shares of the other company.
  • A closed-end fund trading ‘at a premium’ is trading at a price higher than its NAV )net asset value).
  • If the product of a company is priced “at a premium”, it is priced at a higher value than other products from other companies.

Reference for “At A Premium”

https://www.collinsdictionary.com/dictionary/english/at-a-premium

https://idioms.thefreedictionary.com/at+a+premium

https://www.dictionary.com/browse/at–a–premium

https://www.thesaurus.com/browse/at%20a%20premium

https://www.investopedia.com › Investing › Financial Analysis

Academics research on “At A Premium”

comprehensive look at the empirical performance of equity premium prediction, Welch, I., & Goyal, A. (2007). A comprehensive look at the empirical performance of equity premium prediction. The Review of Financial Studies21(4), 1455-1508. Our article comprehensively reexamines the performance of variables that have been suggested by the academic literature to be good predictors of the equity premium. We find that by and large, these models have predicted poorly both in-sample (IS) and out-of-sample (OOS) for 30 years now; these models seem unstable, as diagnosed by their out-of-sample predictions and other statistics; and these models would not have helped an investor with access only to available information to profitably time the market.

Habit formation: resolution of the equity premium puzzle, Constantinides, G. M. (1990). Habit formation: A resolution of the equity premium puzzle. Journal of political Economy98(3), 519-543. The equity premium puzzle, identified by Mehra and Prescott, states that, for plausible values of the risk aversion coefficient, the difference of the expected rate of return on the stock market and the riskless rate of interest is too large, given the observed small variance of the growth rate in per capita consumption. The puzzle is resolved in the context of an economy with rational expectations once the time separability of von Neumann-Morgenstern preferences is relaxed to allow for adjacent complementarity in consumption, a property known as habit persistence. Essentially habit persistence drives a wedge between the relative risk aversion of the representative agent and the intertemporal elasticity of substitution in consumption.

The equity premiumpuzzle, Mehra, R., & Prescott, E. C. (1985). The equity premium: A puzzle. Journal of monetary Economics15(2), 145-161. Restrictions that a class of general equilibrium models place upon the average returns of equity and Treasury bills are found to be strongly violated by the U.S. data in the 1889–1978 period. This result is robust to model specification and measurement problems. We conclude that, most likely, an equilibrium model which is not an Arrow-Debreu economy will be the one that simultaneously rationalizes both historically observed large average equity return and the small average risk-free return.

Forward discount bias: Is it an exchange risk premium?, Froot, K. A., & Frankel, J. A. (1989). Forward discount bias: Is it an exchange risk premium?. The Quarterly Journal of Economics104(1), 139-161. A common finding is that the forward discount is a biased predictor of future exchange rate changes. We use survey data on exchange rate expectations to decompose the bias into portions attributable to the risk premium and expectational errors. None of the bias in our sample reflects the risk premium. We also reject the claim that the risk premium is more variable than expected depreciation. Investors would do better if they reduced fractionally the magnitude of expected depreciation. This is the same result that many authors have found with forward market data, but now it cannot be attributed to risk.

The flight-to-liquidity premium in US Treasury bond prices, Longstaff, F. A. (2002). The flight-to-liquidity premium in US Treasury bond prices (No. w9312). National Bureau of Economic Research.

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