Free Premiums

(noun)

a sales promotion that only requires buying the product to receive the free gift or reward.

Related Terms

Examples of Free Premiums in the following topics:

  • Premiums

    • Premiums are prizes, gifts, or other special offers consumer receive when purchasing products.
    • The Better Crocker Promotional ExampleIn 1929, Betty Crocker began a series of sales promotions that blended premiums, coupons and a loyalty program; it issued redeemable coupons that could be traded for free flatware and other household wares.
    • Another form of consumer sales promotion is the premium.
    • In the United States, each year over $4.5 billion is spent on premiums.
    • Premiums fall into one of two categories: free premiums which only require the purchase of the product and self-liquidating premiums which require consumers to pay all, or some, of the price of the premium.

  • The Freemium Model

    • Freemium, a combination of the words "free" and "premium," is a business model where the company gives away a free service or software to all customers.
    • Feature Limited - set number of features with basic- to get better cooler features move to premium
    • Freemium, a combination of the words "free" and "premium," is a business model where the company gives away a free service or software to all customers.
    • In fact, the concept of a smaller giveaway to attract a premium customer is not new.
    • Feature Limited - set number of features with basic- to get better cooler features move to premium

  • Problems with WACC

    • For example, to calculate the cost of equity we have at least three methods we can use - the dividend growth model, the capital asset pricing model, and the bond yield plus risk premium method.
    • To calculate cost of debt, we add a default premium to the risk-free rate.
    • This default premium is the return in excess of the risk free rate that a bond must yield.
    • To produce the most accurate result, we must take this risk-free rate from a bond containing a similar term structure to our company's debt.
    • Risk-free rates are typically approximated from U.S.

  • The "Bond Yield Plus Risk Premium" Approach

    • The risk premium on its equity is 4%.
    • The equity risk premium is essentially the return that stocks are expected to receive in excess of the risk-free interest rate.
    • In general, an equity's risk premium will be between 5% and 7%.
    • Common methods for estimating the equity risk premium include:
    • It can be very difficult to get an accurate estimate of the risk premium on an equity, having a duration of roughly 50 years, using a risk-free rate of such short duration as a 10-year Treasury bond.

  • The Cost of Debt

    • The cost of debt is a calculation taking into account the risk premium, the risk-free rate and taxes.
    • The risk -free rate (or Rf) is externally determined from the general market, and is described as the overall cost incurred due to time value of money with no risk whatsoever involved.
    • The credit risk rate is therefore the point of negotiation, and where a risk premium is attached to the debt instrument to compensate the investor in regards to a return (for the risk taken).

  • Default Risk and Bond Price

    • For instance, the U.S. government has little risk of default, and investors call U.S. securities default-risk-free instruments.
    • Economists call the difference between the interest rate on the U.S. government bonds and corporate bonds the default risk premium.Investors add default risk premium to a risk-free investment, so they can invest in "risky" bonds because they earn a greater return.
    • Risk premium is always positive.
    • As the default risk increases, then the risk premium increases too.
    • Impact of a risk premium on the bond markets

  • Expected Risk and Risk Premium

    • The term risk premium refers to the amount by which an asset's expected rate of return exceeds the risk free rate.
    • The difference between the return of an asset in question and that of a risk-free asset -- for instance, a US Treasury bill -- can be interpreted as a measure of the excess return required by an investor on the risky asset.
    • The risk premium, along with the risk-free rate and the asset's Beta, is used as an input in popular asset valuation techniques, such as the Capital Asset Pricing Model.

  • Drivers of Market Interest Rates

    • In a free market there will be a positive interest rate.
    • This means that a lender generally charges a risk premium to ensure that, across his investments, he is compensated for those that fail.
    • However, economists generally agree that the interest rates yielded by any investment take into account: the risk-free cost of capital, inflationary expectations, the level of risk in the investment, and the costs of the transaction.
    • where in is the nominal interest rate on a given investment, ir is the risk-free return to capital, pe = inflationary expectations, i*n = the nominal interest rate on a short-term risk-free liquid bond (such as U.S.
    • Treasury Bills), rp = a risk premium reflecting the length of the investment and the likelihood the borrower will default, lp = liquidity premium (reflecting the perceived difficulty of converting the asset into money and thus into goods).

  • Options Contract

    • Furthermore, options are not free.
    • Option holders must pay a fee, called the option premium.
    • If the spot market price rises, subsequently, the option's premium for a European call option increases while the premium decreases for the put option.
    • If the strike price increases, then the option's premium for a European call option decreases while the premium increases for a put option.
    • However, the company has paid the $10,000 premium.

  • Redeeming Before Maturity

    • Redemption is made at the face value of the bond unless it occurs before maturity, in which case the bond is bought back at a premium to compensate for lost interest.
    • The issuer has the right to redeem the bond at any time, although the earlier the redemption takes place, the higher the premium usually is.
    • With some bonds, the issuer has to pay a premium, the so-called call premium.
    • To be free from these covenants, the issuer can repay the bonds early, but only at a high cost.