DEFINITION of Term
In finance, the expression term has a couple of meanings:
- The lifespan assigned to an asset or a liability, over which the value of the asset/liability is expected to either grow or shrink, depending on its nature.
- The period of time assigned as the lifespan of any investment. In the case of debt, the time it takes for all payments to be made by the borrower and received by the lender. In the case of an equity investment, the time that elapses between the acquisition of the equity and its sale or removal from holdings for another reason.
A term can also specify a provision or nature of an agreement or contract, as in terms and conditions.
BREAKING DOWN Term
The life of an asset or investment generally falls into one of two main categories: short-term and long-term. An investment can be held for a very, very short period of time — for instance, a day trader might buy and sell a stock within seconds. On the other hand, the life of an investment can be as long as the life of a piece of land, which can span several generations and pass through the hands of many investors.
Fixed income products generally add a third timeframe: intermediate. Short-term bonds are said to have a maturity, or term, of less than a year. Intermediate bonds will range anywhere from two to ten years in term. Lastly, long-term bonds have a maturity anywhere beyond 10 years.
When evaluating different securities, the term (or maturity) of a product can play a significant or insignificant role in assessing the security's riskiness. For example, the two and 10-year Treasury bond has no real premium for credit risk over time, as the U.S. is virtually default free between its short-term and long-term debts. However, for a bond rated junk, there's a big difference in credit risk between a bond maturing in two years and another maturing in 10 years.