What Is Tenor?

Tenor refers to the length of time remaining before a financial contract expires. It is sometimes used interchangeably with the term maturity, although the terms have distinct meanings. Tenor is used in relation to bank loans, insurance contracts, and 澳洲幸运5开奖号码历史查询:derivative products.

Understanding Tenor

Tenor is often used in relation to bank loans and 澳洲幸运5开奖号码历史查询:insurance contracts, whereas the term maturity is more often used when describing 澳洲幸运5开奖号码历史🎀查询:government bonds and corporate bonds. Colloquiallꦍy, the two terms hav😼e very similar meanings, and they may be used interchangeably for different types of financial instruments.

The term tenor is also used in relation to non-standard financial instruments, such as derivative contracts. In this context, it is often used when describing the 澳洲幸运5开奖号码历史查询:riskiness of a particular security.

For instance, a 澳洲幸运5开奖号码历史查询:futures contract with a long tenor could be said to be relatively risky because there is still significant time in which its value might fall. Derivatives with shorter tenors would likewise be viewed as less risky. As compensation for this perceived risk, buyers of high-tenor securities will generally require compensation in the form of lower prices or higher 澳洲幸运5开奖号码历史查询:risk premiums.

Depending on their risk tolerance and financial objectives, some investors may even systematically avoid securities with tenors longer than the specified period. For instance, a company wishing to manage its short and medium-term liquidity needs might buy and sell debt instruments with tenors of five years or less. In this context, adjustments might be made based on the perceived 澳洲幸运5开奖号码历史查询:creditworthiness of the counterparties involved. For instance, a company might accept a five-year tenor for 澳洲幸运5开奖号码历史查询:counterparties with high 澳洲幸运5开奖号码历史查询:credit ratings, while limiting poorꦓly-rated counterparties to tenors of three yearᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚs or less.

Tenor vs. Maturity

From a technical perspective, tenor and maturity have distinct meanings. Whereas tenor refers to the length of time remaining i🐈n a contract, maturity refers to the agreed-upon end date of the agreement upon its inception.

For example, if a 10-year government bond was issued five years ago, then its maturity would be 10 years and its tenor—the time remaining until the end of the contract—would be five years. In this manner, the tenor of a financia🐻l instrument decl🎃ines over time, whereas its maturity remains constant.

Example of Tenor

Alex is the 澳洲幸运5开奖号码历史查询:chief financial officer (CFO) of a mid-s🧸ize publicly traded corporation. As part of their portfolio of responsibilities, they must ensure that the company has adequate working capital to carry out its operations.

To that e𒅌nd, Alex buys and sells short and medium-term financial instruments with tenors ranging between one and five years. They do so in the corporate bond market as well as through over-the-counter deriv൲ative transactions with various counterparties.

Currently, Alex's portfolio includes several instruments from highly creditworthy counterparties with maturities of five years. Because they were purchased three years ago, these securities have tenors of two years. Their portfolio also includes instruments from counterparties with weaker credit ratings. For these instruments, they limit their maximum tenor to three years, in order to manage their 澳洲幸运5开奖号码历史查询:counterparty risk.

Special Considerations

Tenor is particularly important in a 澳洲幸运5开奖号码历史查询:credit default swap because it coordinates the term remaining on the contract with the maturity of the underlying asset. A properly structured credit default swap must match the maturity between contract and asset. If there is a mismatch between the tenor and the asset's maturity, then integr𒁏ation is not likely. Furthermore, coordination between cash flows (and subsequent calculation of yield) is only possible when tenor and asset maturity are linked.

The Bottom Line

Understanding the tenor of any financial instruments a company may hold, such as a short- or long-term derivative, is crucial to maintaining a steady cash flow and analyzing a contract's riskiness.

Correction—April 10, 2024: This article has been edited from a previous version that incorrectly defined matur𒁏ity as the initial length of a contract upon its inception. Maturity refers to the date when a transaction or investment ends.