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 derivative products.
- The term tenor describes the length of time remaining in the life of a financial contract.
- By contrast, maturity refers to the initial length of a contract upon its inception.
- Higher-tenor contracts are sometimes considered riskier, and vice versa.
Tenor is often used in relation to bank loans and insurance contracts, whereas the term maturity is more often used when describing government bonds and corporate bonds. Colloquially, the two terms have 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 riskiness of a particular security. For instance, a 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 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 creditworthiness of the counterparties involved. For instance, a company might accept a five-year tenor for counterparties with high credit ratings, while limiting poorly-rated counterparties to tenors of three years or less.
Tenor vs. Maturity
From a technical perspective tenor and maturity have distinct meanings. Whereas tenor refers to the length of time remaining in a contract, maturity refers to the initial length of the agreement upon its inception.
For example, if a 10-year government bond was issued five years ago, then its maturity would be ten years and its tenor—the time remaining until the end of the contract—would be five years. In this manner, the tenor of a financial instrument declines over time, whereas its maturity remains constant.
Example of Tenor
Emma is the chief financial officer (CFO) of a mid-size publicly traded corporation. As part of her portfolio of responsibilities, she must ensure that the company has adequate working capital to carry out its operations.
To that end, Emma buys and sells short and medium-term financial instruments with tenors ranging between one and five years. She does so in the corporate bond market as well as through over the counter derivative transactions with various counterparties.
Currently, Emma'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. Her portfolio also includes instruments from counterparties with weaker credit ratings. For these instruments, she limits her maximum tenor to three years, in order to manage her counterparty risk.