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I'm curious why longer term bonds have better yields than short term bonds. The bond yield curve, slopes upward with longer term bonds.

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  • Neither, it is because of Liquidity Premium en.wikipedia.org/wiki/Liquidity_premium
    – base64
    Sep 1, 2020 at 3:12
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    Your title and question don't seem to match. Can you update the question to include the concepts referenced in the title?
    – D Stanley
    Sep 1, 2020 at 13:32

1 Answer 1

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To be fair, sometimes shorter bonds have higher yields, but it's typically a transient event (called an "inverted" yield curve).

The reason that longer-term fixed rate bonds typically have higher yields is that investing in longer-term bonds increases the risk that interest rates will rise, and the bond will become less valuable. With shorter-term bonds, one could reinvest the proceeds at market rates after maturity, but for longer term bonds the money is either locked up or the bond must be sold to reinvest. So the higher yield is compensating for additional risk.

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