The additional interest that investors require to buy a long-term bond instead of a sequence of short-term bonds is known as the
A) risk premium.
B) default premium.
C) term premium.
D) segmented premium.

Question

Quizplus · Accepted Answer

The additional interest that investors require to buy a long-term bond instead of a sequence of short-term bonds is known as the term premium. This is because investors are taking on more risk by locking their money into a long-term bond, and so they require a premium to compensate for this. The risk premium (A) is a broader term that refers to the additional return required to invest in any type of risky asset. The default premium (B) is the additional interest that investors require to compensate for the possibility that the bond issuer may default on their payments. Finally, the segmented premium (D) is a term used to describe a situation where investors are not willing to substitute bonds of one maturity for bonds of another maturity. This does not directly relate to the question of why long-term bonds require a higher interest rate.

The Additional Interest That Investors Require to Buy a Long-Term