Maturity risk premium is an important component of the yield curve, which is a graphical representation of the yields of bonds with different maturities. The yield curve usually slopes upward, indicating that longer-term bonds have higher yields than shorter-term bonds with similar credit risk. This upward slope reflects the maturity risk premium.
The maturity risk premium varies depending on the prevailing interest rate environment and the credit quality of the bond issuer. Generally, investors demand higher maturity risk premiums during periods of higher interest rates, as longer-term bonds become less attractive due to the risk of rising interest rates.
In summary, the maturity risk premium is the compensation demanded by investors for holding a longer-term bond compared to a shorter-term bond with similar credit risk. It reflects the risk of fluctuations in interest rates over a longer period and varies depending on the prevailing interest rate environment and the credit quality of the bond issuer