Term premium

The extra yield investors demand for locking their money up for many years, on top of what they expect short-term rates to average. It compensates for uncertainty about inflation and government finances.

Example

If investors expect the policy rate to average 4.0% over the next ten years and the 10-year yield is 4.5%, the term premium is about 0.5 points. It can’t be observed directly, so economists estimate it with models.