Term premium
Principles of Finance glossary · Principles Of Finance
Definition
Excess yield on a long bond over the expected average of future short rates.
Term premium in plain English
If you lend money for 10 years instead of rolling over a series of short one-year loans, you're taking on more uncertainty — a lot can change over a decade. The term premium is the EXTRA yearly return you demand as payment for locking your money up that long. In other words, a long bond's yield is roughly what people expect short-term interest rates to average over those years, PLUS this bonus for the added risk and inconvenience. It's like the difference between committing to a year-long gym membership versus paying day-by-day: you'd want a discount (a reward) for agreeing to be locked in.
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