Term premium
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Yields.
Term premium is the extra return that investors demand to compensate them for the risk associated with a longer-term bond investment.
It is the main reason for the upward slope of a 'normal' rising yield curve.
- Term premia: models and some stylised facts
- "... long-term interest rates can be broken out into a part that reflects the expected path of short-term interest rates and a term premium.
- ... the latter part represents the compensation, or risk premium, that risk-averse investors demand for holding long-term bonds.
- This compensation arises because the return earned over the short term from holding a long-term bond is risky, whereas it is certain in the short term for a bond that matures over the same short investment horizon.
- While some types of investor, such as pension funds, may consider long-term bonds less risky given their long-term liabilities, most other investors would tend to view them as more risky."
- Bank for International Settlements, Quarterly Review, September 2018.
