Term Premium
The extra yield lenders require for holding a longer-maturity bond rather than rolling short-maturity ones.
Formula
Term Premium = Long-Maturity Yield - Average Expected Short-Term Rate over the same period
Unit
bps
In depth
The term premium is compensation for the additional uncertainty of committing money for longer — inflation could rise, credit conditions could change, and the lender cannot recall the loan. It is not directly observable, since expected future short rates are unknown, so it must be estimated by a model and different models produce different numbers. It is what makes a normal yield curve slope upward even when rates are expected to be unchanged. When it compresses toward zero or turns negative, long bonds are offering little or nothing extra for the extra risk.
Worked example
A ten-year yield of 7.3% when short rates are expected to average 6.9% implies a term premium of about 40 basis points. A lender committing for ten years is being paid 0.4 percentage points for the extra uncertainty.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Term Premium” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.