Tenor, expressed in years, months, or days, is the amount of time that remains before a financial agreement expires. Tenor typically relates to insurance policies and bank loans. For the lender, high-tenor contracts are frequently viewed as riskier.
Definition and Example of Tenor in Lending
In the context of lending, tenor refers to how long a financial agreement will last, specifically how long it will take a borrower to repay a loan. Short-term loans are structured differently from long-term loans, and the loan structure is frequently based on tenure.
Although the words “tenor” and “maturity” are frequently used interchangeably, there are several critical distinctions between the two. You can assess financial items more accurately if you comprehend how tenor in lending functions.
Depending on where you are in the repayment procedure, the tenor can fluctuate. For instance, a 30-year mortgage that you take out is considered to have a 30-year tenor. The loan has a tenor of 20 years after being retained for 10 years.
How Tenor in Lending Works
Tenor, which is frequently used interchangeably with the word “maturity,” in the context of lending refers to how long a financial contract will remain in effect. Given that tenor can alter the terms of a loan, it is crucial to comprehend how it operates in lending.
Short-term loans, for instance, frequently have more lenient lending terms and lower interest rates. Longer-term loans, in contrast, have greater interest rates.
In credit default swaps, the tenor is particularly significant. Credit default swaps are essentially insurance contracts that guard against a bond issuer’s default. The risk of one lender may be exchanged with another lender. But the tenor between the contract and the asset’s maturity must match for the credit default swap. A credit default swap’s typical duration is five years.
Types of Tenor
The following categories of lending products are often referred to as having a tenor.
Bank Loans
Tenor is the amount of time till the loan is due when you take out a bank loan. For instance, you have a five-year tenor when you take out a five-year loan. You have a two-year tenor once the loan has been paid off for three years.
Insurance Products
Tenor refers to the price you pay for an insurance product to the length of time until the financial product expires. For example, if you buy a 20-year term life insurance policy and have been making payments for five years, you have a 15-year tenor.
Tenor vs. Maturity
Tenor and maturity are frequently used interchangeably, and there are many connections between the two concepts. We’ll examine some of the most significant variations between tenor and maturity.
| Tenor | Maturity |
|---|---|
| The length of time until a lending product expires | The period when the principal must be repaid |
| Often used to describe bank loans and insurance products | Often used to describe corporate and government bonds |
The term “tenor” in the context of lending describes how long a lending product will last. It’s frequently used to describe insurance policies and bank loans.
High-tenor loans are frequently thought of as being riskier for the lender. In contrast, maturity is a term used to define corporate and government bonds and refers to the time frame during which the interest must be paid.
The simplest approach to compare and contrast tenor and maturity is as follows: You have a five-year tenor if you are five years into a ten-year loan term. Wherever you are in the repayment process, though, your maturity is 10 years.
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