Grabban joined the Cherries in the summer of 2012 for £300,000 from Rotherham and the new deal will keep the 25-year-old striker at the Goldstands Stadium until June 2016.
He has been in fine form this season for the Cherries, scoring seven goals in 15 appearances as Eddie Howe's men have adapted to life in the Championship.
"I'm pleased to have it done because we've been trying to get it sorted for a while, so I'm looking forward to getting on with the football again," he told the club's website.
"I still had two years left on my contract but the club wanted to extend it and I was more than happy to do that.
"It's a good place to be at the moment and the club is on the rise, so I see it as a positive thing to extend my stay here."