A “term premium” is compensation embedded in longer-term interest rates beyond the expected path of short rates. The exact measure is model-dependent; the Federal Reserve source explicitly notes alternative definitions and a convexity component.
ReviewedEvidence1 sourceSectionPhrases & Idioms
Quick answer
In the Federal Reserve term-structure model used here, a term premium is the part of a bond yield above the expected average short rate over the bond’s life.
Key details
Canonical Formterm premium
Core MeaningIn the Federal Reserve term-structure model used here, a term premium is the part of a bond yield above the expected average short rate over the bond’s life.
Further guidance
History Boundary
Current authoritative financial meaning is published without claiming an exact inventor, coinage date, or absolute first use.
Meaning
In the Federal Reserve term-structure model used here, a term premium is the part of a bond yield above the expected average short rate over the bond’s life.
Usage Boundary
Term premium is not a single directly observed market price and definitions can differ across models; do not treat every long-short yield difference as the term premium.
Sources and evidence
Sources are shown with the role they play in this guide. Historical or style-sensitive claims are kept within the evidence boundary described above.
The Federal Reserve measure called the excess bond premium is the residual component of corporate bond spreads after accounting for expected default losses and is used as a gauge of bond-investor risk sentiment. This is a model-based Federal Reserve measure, not a synonym for the entire credit spread and not a universally fixed formula across all research settings.
A “liquidity premium” compensates investors for lower market liquidity. The St. Louis Fed illustrates it with a liquidity spread between assets matched on maturity and safety but differing in liquidity.
A “risk premium” is the additional expected return investors require as compensation for bearing risk relative to a safer benchmark. The specific premium depends on the asset and risk being measured, and many risk premiums are estimated rather than directly observed.
A term spread is the difference between interest rates or yields at two different maturities, commonly a longer-term rate minus a shorter-term rate. A term spread is one comparison between two maturities; it is not the whole yield curve and its interpretation depends on which maturities are chosen.
Actionable Indication of Interest is a current federal securities-regulation defined term. This guide preserves the rule-specific definition and boundaries instead of replacing it with informal market shorthand.
Administrative Data is a current Regulation NMS defined term for specified administrative, control, and technical messages in the market-data plan framework.
Affiliate of a Subscriber is a current Regulation ATS defined term. This guide preserves the rule-specific meaning and boundary instead of replacing it with informal market shorthand.
Under current U.S. Regulation NMS definitions, aggregate quotation size is the sum of the quotation sizes of all responsible brokers or dealers communicating bids or offers in an NMS security at the same price. Treat this as a U.S. securities-regulation definition; it should not be generalized to unrelated uses of aggregate size or quotation outside Regulation NMS.
