What is the 10-year to 3-month term premium of the following yield curve?

To determine the 10-year to 3-month term premium, one would first look at the yields of both securities on the yield curve. The term premium is essentially the difference between the yield on the long-term bond (in this case, the 10-year) and the yield on the short-term bond (the 3-month), adjusted for expectations of future interest rates and potential risks.

In analyzing this, the selected answer reflects a calculated difference between the 10-year yield and the 3-month yield that represents the additional compensation investors demand for holding a longer-term bond compared to a shorter-term bond. This premium is affected by factors such as inflation expectations, economic activity projections, and interest rate changes.

When examining the specific number chosen, it indicates a moderate premium, which is plausible given the current economic environment where longer-term securities often provide a higher yield compared to shorter-term ones due to these risks. The correct answer encapsulates the typical relationship between these yields on a standard yield curve, illustrating the risk-return tradeoff that characterizes bond investments.