Loading the player...

What is a 'Tenor'

Tenor in finance can have multiple usages, but it most commonly refers to the amount of time left for the repayment of a loan or until a financial contract expires. It is most commonly used for nonstandardized contracts, such as foreign exchange and interest rate swaps, while the term maturity is usually used to express the same concept for government bonds and corporate bonds. Tenor can also refer to the payment frequency on an interest rate swap.

BREAKING DOWN 'Tenor'

The tenor of most financial instruments declines over time, while the maturity remains constant. Risk associated with a given asset tends to decline with the reduction of the time remaining to maturity. The tenor of an interest rate swap can also refer to the frequency with which coupon payments are exchanged.

Risk

In general, the risk associated with a given instrument decreases as the time to maturity, the tenor, declines. This is because the longer the period of time to maturity, the greater the chance that something will go wrong, which could cost the investor all or part of their principal. This is why, in general, an interest rate swap with a longer tenor will require a bigger spread.

Some investors will not buy financial instruments or enter contracts with a tenor longer than a certain period because of the associated risk; the tenor limit can also vary depending on the credit rating of the counter-party. For example, a bank might enter into a five-year interest rate swap with a AA-rated company but only a three-year swap with an A-rated company.

Swaps

An interest rate swap is the exchange of one type of interest rate payment, usually a fixed rate, for another type of payment, which is usually a floating rate. The interest coupons are exchanged between the two parties at stipulated intervals. The interval is sometimes referred to as the tenor of the swap.

For example, one of the most common swaps involves the exchange of a fixed rate for payments at the U.S. three-month LIBOR rate, paid semi-annually. This means that while the floating rate is reset quarterly, the payments are compounded and paid semi-annually. This would be considered a six-month tenor.

Basis swaps are the exchange of one floating rate index for another, such as the one-month U.S. dollar LIBOR for the three-month U.S. dollar LIBOR. The swaps are often structured so that interest rate payments are only exchanged on the longer of the two periods. In this example, payments would be exchanged every three months, which is the tenor of the swap. Matching the coupon payments reducing the credit risk for the counter-party paying one month LIBOR, who otherwise would make three payments for every one received.

RELATED TERMS
  1. Interest Rate Swap

    An agreement between two parties (known as counterparties) where ...
  2. Swap Rate

    The rate of the fixed portion of a swap as determined by its ...
  3. Swap

    A derivative contract through which two parties exchange financial ...
  4. Currency Swap

    A swap that involves the exchange of principal and interest in ...
  5. Asset Swap

    Similar in structure to a plain vanilla swap, the key difference ...
  6. Liability Swap

    An exchange of debt related interest rates between two parties ...
Related Articles
  1. Investing

    Explaining Tenor

    Tenor is the length of time to maturity of a debt, contract or loan.
  2. Trading

    How Are Interest Rate Swaps Valued?

    When trading in financial markets, higher returns are generally associated with higher risk. Hedge your risk with interest rate swaps.
  3. Managing Wealth

    An In-Depth Look At The Swap Market

    The swap market plays an important role in the global financial marketplace; find out what you need to know about it.
  4. Trading

    An Introduction To Swaps

    Learn how these derivatives work and how companies can benefit from them.
  5. Investing

    What's an Interest Rate Swap?

    An interest rate swap is an exchange of future interest receipts. Essentially, one stream of future interest payments is exchanged for another, based on a specified principal amount.
  6. Investing

    How To Read Interest Rate Swap Quotes

    Puzzled by interest rate swap quotes terminology? Investopedia explains how to read the interest rate swap quotes
  7. Trading

    Different Types of Swaps

    Investopedia explores the most common types of swap contracts.
  8. Trading

    Interest Rate Swaps Explained

    Plain interest rate swaps that enable the parties involved to exchange fixed and floating cash flows.
  9. Trading

    Currency Swap Basics

    Find out what makes currency swaps unique and slightly more complicated than other types of swaps.
  10. Trading

    Hedging With Currency Swaps

    The wrong currency movement can crush positive portfolio returns. Find out how to hedge against it.
RELATED FAQS
  1. Why is tenor important on credit default swaps?

    Read about the relationship between a credit default swap's tenor and the maturity of an underlying loan asset and why the ... Read Answer >>
  2. In a repurchase agreement (repo) why is a longer tenor more risky?

    Learn about the relationship between repo tenor length and risk, and find out how tenor affects interest rate risk and counterparty ... Read Answer >>
  3. Can individual investors profit from interest rate swaps?

    Find out how individual investors can speculate on interest rate movements through interest rate swaps by trading fixed rate ... Read Answer >>
  4. How do companies benefit from interest rate and currency swaps?

    An interest rate swap involves the exchange of cash flows between two parties based on interest payments for a particular ... Read Answer >>
  5. What is an absolute rate?

    An absolute rate is easy to understand once you know the basics of an interest rate swap. An absolute rate is the fixed rate ... Read Answer >>
  6. What are interest rate swaps on the OTC market?

    Learn about interest rate swaps and how they are traded over the counter, and understand the impact of Dodd-Frank on swaps ... Read Answer >>
Hot Definitions
  1. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  2. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  3. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  4. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  5. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  6. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
Trading Center