What type of premium compensates investors for the risk associated with interest rate changes over time?

The maturity-risk premium compensates investors for the uncertainty associated with interest rate changes that can occur over the duration of a bond or fixed-income investment. When an investor purchases a bond, the longer the maturity date, the more exposure they have to fluctuations in interest rates. If interest rates rise, the market value of existing bonds falls, resulting in potential losses for long-term investors who may not be able to sell their bonds at favorable prices before maturity. Therefore, to incentivize investors to take on this increased risk of price volatility with longer-duration bonds, issuers typically offer a higher yield, known as the maturity-risk premium.

In contrast, the liquidity-risk premium relates to the potential difficulty in selling an investment quickly without impacting its price. The default-risk premium compensates for the possibility that a borrower will not meet their debt obligations. The inflation premium accounts for the expected decrease in purchasing power due to inflation. Each of these premiums addresses different risks, but it is the maturity-risk premium that specifically addresses the risks tied to interest rate changes over time.