Marketability Premium
Marketability premiums can be indicated to be an extra interest rate that is charged by investors to companies that are dealing with stocks, bonds, and securities that are not easy to sell. All organizations that deal with low moving but highly profitable products are required to pay this premium to the loan issuing firms when paying back their loan. In most cases, it is indicated that the uncertainty that the organization has on the demand of a product is the one that determines whether the company should or should not pay the premium. The size of the company is the primary determinate of the amount of marketability premium to be paid. At the same time, the companies whose securities or bonds have lower marketability pay more compared to those with higher marketability. The value is calculated by subtracting the risk-free rates from the anticipated equity market return.
There are reasons to why the issuing companies have to pay this premium. To begin with, they pay to increase the number of investors purchasing their securities who turns to be their potential customers. Therefore, it is used as a way of motivating and attracting investors as it is seen as a form of discount since most investors prefer to invest in securities that are profoundly moving as they are easy to convert to cash without losing value. Also, because their security is less marketable and most investors prefer the ones with more marketability as less marketable securities loss value easily.