Tenor

Tenor refers to the duration of time that must elapse before a financial instrument such as a bill of exchange or promissory note becomes due for payment.
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What is Tenor in Accounting?

Definition

Tenor is a financial term that describes the time period specified on a financial instrument, such as a bill of exchange or promissory note, before it reaches its maturity date and becomes due for payment. It essentially outlines how long the instrument remains valid before the payment is required.

Examples

  1. Bill of Exchange: A bill of exchange might state that the payee must be paid a certain amount ‘90 days after sight’. In this case, the tenor is 90 days.

  2. Promissory Note: A promissory note might specify that the issuer will pay the holder $1,000 in ‘6 months’. Here, the tenor is six months.

Frequently Asked Questions (FAQs) about Tenor

  1. What is the difference between tenor and maturity in finance?

    • The tenor is the length of time until a financial instrument must be paid, while maturity is the date on which the instrument actually becomes due.

  2. Can the tenor of a financial instrument be changed?

    • Typically, the tenor is set when the financial instrument is issued and cannot be changed without creating a new agreement.

  3. Does a longer tenor mean more risk for the holder?

    • Generally, a longer tenor can indicate higher risk due to the extended period before payoff, which can be affected by various uncertainties and market conditions.

  4. How is tenor important in trade finance?

    • Tenor is crucial in trade finance as it affects both the risk management and cash flow planning for the parties involved in the transaction.

  5. Does the interest rate vary with different tenors?

    • Yes, interest rates can vary based on the tenor of the financial instrument. Generally, longer tenors may have higher interest rates due to the extended risk.

  • Bill of Exchange: A written order used primarily in international trade that binds one party to pay a fixed amount of money to another party at a predetermined future date.

  • Promissory Note: A financial instrument that contains a written promise by one party to pay another party a definite sum of money, either on-demand or at a specified future date.

  • Maturity Date: The final payment date of a financial instrument at which point the principal (amount loaned or invested) and any remaining interest are due to be paid.

Online Resources

  1. Investopedia: Tenor Definition
  2. Wikipedia: Bill of Exchange
  3. Wikipedia: Promissory Note

Suggested Books for Further Studies

  1. “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
  2. “Financial Accounting and Reporting” by Barry Elliott and Jamie Elliott
  3. “Accounting for Financial Instruments” by Cormac Butler

Accounting Basics: “Tenor” Fundamentals Quiz

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