What is the term premium in the context of bonds?
Understand the Problem
The question is asking for the definition or explanation of the term premium specifically related to bonds, which involves understanding how it represents the extra yield that investors require for holding longer-term bonds compared to shorter-term ones.
Answer
The compensation for bearing interest rate risk over the life of the bond.
The final answer is the compensation that investors require for bearing the risk that interest rates may change over the life of the bond.
Answer for screen readers
The final answer is the compensation that investors require for bearing the risk that interest rates may change over the life of the bond.
More Information
The term premium varies over time and is influenced by various macroeconomic factors including the economic outlook, monetary policy, and investor sentiment.
Tips
Mistaking term premium as a fixed extra cost, rather than a fluctuating compensation for risk, is a common error.
Sources
- The web page with info on - Example Source - newyorkfed.org
- Bond term premiums are now a focus for the Fed - reuters.com
- Term premium - ACT Wiki - wiki.treasurers.org
