Tenor

What Is Tenor?

Tenor alludes to the time span staying before a financial contract terminates. It is now and again utilized reciprocally with the term maturity, albeit the terms have distinct meanings. Tenor is utilized corresponding to bank loans, insurance contracts, and derivative products.

Grasping Tenor

Tenor is many times utilized comparable to bank loans and insurance contracts, though the term maturity is all the more frequently utilized while depicting government bonds and corporate bonds. Conversationally, the two terms have very much like meanings, and they might be utilized conversely for various types of financial instruments.

The term tenor is additionally utilized according to non-standard financial instruments, like derivative contracts. In this specific circumstance, it is much of the time utilized while portraying the riskiness of a particular security.

For example, a futures contract with a long tenor could be supposed to be somewhat risky in light of the fact that there is as yet critical time in which its value could fall. Derivatives with shorter tenors would moreover be considered safer. As compensation for this perceived risk, buyers of high-tenor securities will generally require compensation as lower prices or higher risk premiums.

Contingent upon their risk tolerance and financial objectives, a few investors might even deliberately keep away from securities with tenors longer than the predefined period. For example, a company wishing to deal with its short and medium-term liquidity requirements could buy and sell debt instruments with tenors of five years or less. In this specific circumstance, changes may be made in view of the perceived creditworthiness of the counterparties in question. For example, a company could acknowledge a five-year tenor for counterparties with high credit ratings, while at the same time limiting inadequately evaluated counterparties to tenors of three years or less.

Tenor versus Maturity

According to a technical viewpoint, tenor and maturity have distinct meanings. While tenor alludes to the period of time staying in a contract, maturity alludes to the initial length of the agreement upon its commencement.

For instance, on the off chance that a 10-year government bond was issued five years prior, its maturity would be decade and its tenor — the time staying for the rest of the contract — would be five years. As such, the tenor of a financial instrument declines over time, though its maturity stays consistent.

Illustration of Tenor

Alex is the chief financial officer (CFO) of a mid-size publicly traded corporation. As part of their portfolio of obligations, they must guarantee that the company has adequate working capital to carry out its operations.

Keeping that in mind, Alex buys and sells short and medium-term financial instruments with tenors running somewhere in the range of one and five years. They do as such in the corporate bond market as well as through over-the-counter derivative transactions with different counterparties.

Presently, Alex's portfolio incorporates several instruments from highly creditworthy counterparties with maturities of five years. Since they were purchased three years prior, these securities have tenors of two years. Their portfolio likewise incorporates instruments from counterparties with more fragile credit ratings. For these instruments, they limit their maximum tenor to three years, to deal with their counterparty risk.

Special Considerations

Tenor is particularly important in a credit default swap on the grounds that it organizes the term staying on the contract with the maturity of the underlying asset. An appropriately structured credit default swap must match the maturity among contract and asset. On the off chance that there is a mismatch between the tenor and the asset's maturity, integration isn't logical. Furthermore, coordination between cash flows (and subsequent calculation of yield) is just conceivable when tenor and asset maturity are linked.

Tenor FAQs

What's the significance here?

Tenor alludes to the time span staying before a financial contract terminates. It is frequently utilized conversely with the term "maturity."

What Is Tenor in Banking?

Tenor, concerning banking, alludes to the time allotment that will be taken by the borrower to repay the loan along with the interest. Generally, a home loan residency might be from 5-20 years for certain banks permitting as long as 25 years

What Is Maximum Tenor?

The loan tenor is regularly somewhere in the range of 5 and 25 years, with a maximum of 30 years, contingent upon the type of project and its debt servicing capacity.

What Is Tenor Basis Risk?

Tenor basis risk is the risk that emerges when a basis swap happens. In spite of re-estimating on a similar date, being in a similar currency, and being linked to similar benchmark, issues could emerge when they re-cost in the event that they do as such for various periods or tenors.

The Bottom Line

Understanding the tenor of any financial instruments a company might hold, like a short-or long-term derivative, is pivotal to keeping a consistent cash flow and investigating a contract's riskiness.

Highlights

• Higher-tenor contracts are at times viewed as riskier, and vice versa.
• Understanding the tenor of a financial contract is pivotal to break down the contract's riskiness and keep a consistent cash flow.
• Tenor is particularly important in a credit default swap since it facilitates the term staying on the contract with the maturity of the underlying asset.
• The term tenor portrays the timeframe staying in the life of a financial contract.
• On the other hand, maturity alludes to the initial length of a contract upon its beginning.