Loan Tenor is the amount of time until a loan is due. It describes the length of time remaining in the life of a financial contract. To break it down in mathematical terms, Loan Tenor is equal to Loan Term minus Time Passed. Tenor is often used in relation to bank loans, insurance contracts, and derivative products, not to be confused with maturity, which is more often used when describing government bonds and corporate bonds. Within its use in derivative contracts, it is often used to describe the riskiness of a particular security. Low tenor contracts are often considered safer than high tenor contacts which are riskier. Understanding the tenor of any financial instruments a company may own such as short- or long-term derivatives, is crucial to maintaining a steady cash flow and analyzing a contract’s riskiness. A company might accept a five-year tenor for counterparties with high credit ratings, while limiting counterparties with poor credit ratings to tenors of three years or less in order to minimize risk. An example of loan tenor would be, if a loan is taken out with a four-year tenor, and two years pass, the tenor of the loan is two years.
Used in a sentence
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 counterparty risk.
If a homeowner is 10 years into a 30-year mortgage, the tenor is 20 years.
Loan Tenor Calculation
Loan Tenor = Loan Term – Time Passed