Question

1. Define the following terminology from fixed-income markets:
   1. Term structure
2. 2. Term spread
3. 3. Term premium

Answer 1

Terminology from fixed-income markets :

1. Term Structure : The term structure refers to the relationship between short-term and long-term interest rates. The term structure refers to the relationship between the yields and maturities of a group of bonds with the same credit rating. The word structure usually applies to Treasury securities but it may also apply to riskier securities, i.e. AA bonds. A representation of the term structure of interest rate is defined as a yield curve.

2. Term Spread : Term spreads, also known as interest rate spreads, reflect the difference between the long-term interest rates on debt securities such as bonds and short-term interest rates.
     Term spreads are most often used in the comparison and evaluation of two bonds, which are fixed interest financial assets issued by governments, companies, public utilities, and other large entities.

3. Term premium : The term premium is the sum by which long-term bond yields are greater than short-term bond yields. This premium represents the amount creditors expect to be paid for longer periods of lending. The amount of a term premium depends on the interest rates of the individual bonds. The calculation of the term premium shall deduct from the observed bond yield the survey estimate of the estimated average short rate.