When investing, why are long-term rates higher then short-term?

[gilleabart]

i'm trying to study for a commerce test, but i'm stuck on this one question...
the question reads:
Explain why long-term interest rates are generally higher then short-term interest rates when investing.

My Answer is:
Long-term interest rates are generally higher then short-term interest rates because short-term interest rates are payed more often, so the value of the investment would compound, increasing value faster then the long-term investment. The long-term interest rates are increased so that they can confront the amounts offered by short-term investments to appeal to consumers.

i'm not sure if i've got the right answer and am worried.. can anyone confirm what i've written is correct?

[montgomery69]

replace then with than (in your answer - some teachers find that typo annoying).
replace payed with paid
Always capitalize the "I" in front of a sentence.
Your answer is incorrect.
Long term and short term can pay equally as often.

Long term pay more simply because you have to keep the money invested longer.
Imagine if short term paid 5%, and long term paid 1%.
Would anyone buy long term?

[karlitis]

replace then with than (in your answer - some teachers find that typo annoying).
replace payed with paid
Always capitalize the "I" in front of a sentence.
Your answer is incorrect.
Long term and short term can pay equally as often.

Long term pay more simply because you have to keep the money invested longer.
Imagine if short term paid 5%, and long term paid 1%.
Would anyone buy long term?

You have part of the right answer. Long-term investment requires investors to give up access to their money for a significant period of time - and few investors would do this if the payout for doing so was not significantly more attractive than for short-term investing. Additionally, investors demand a higher rate of return for taking greater risks. The longer investors have to wait for their final payoff on the bond, the greater the chance that something will intervene to erode the investment's value - so investing money long-term is riskier to the investor than investing it short-term. That's also the reason that stocks, which are perceived as riskier than bonds, tend to return more.

[fiacre68]

Money has a value. The longer you lend money to someone else it has a slightly higher value. Hence a higher interest rate. Also the longer the term the more risk to the interest not being sufficient (due to general interst rates rising)

[dickens93]

Long- term pay higher because several risk premiums are added or are higher compared to short-term

1) In the long run the risk of default is higher, hence default risk premium is higher.
2) Your money stays with them for a longer period so an investor in long-term investment is compromising on liquidity - Hence add liquidity premium

:)

[laureano97]

Two reasons:

1. Time value of money

2. Risk - the longer the time, the greater chance of unforeseen problems, exceptions, and default.