Glossarytaught in FI1.03, M7.03
Term premium
Also called maturity premium, term premia.
The extra yield investors demand for holding a long bond rather than rolling short ones, over and above expected future short rates.
Where expected average short rates over ten years are 6.8% and the ten-year yields 7.2%, the term premium is 40 basis points.
It compensates for the risk that rates move against the holder, and it varies with uncertainty about inflation and with the supply of long-dated government debt.
It can't be observed directly and is estimated from models, so published figures differ.