Tenor

Tenor Bill of Exchange Promissory Note Financial Instruments Payment Due Date Maturity Period Accounting Finance
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

### What does tenor refer to in financial terms? - [ ] The total amount payable on a financial instrument. - [x] The time period before a financial instrument becomes due for payment. - [ ] The interest rate of a financial instrument. - [ ] The identity of the payer or payee. > **Explanation:** Tenor refers to the duration of time before a financial instrument such as a bill of exchange or promissory note becomes due for payment. ### What happens at the end of the tenor? - [ ] The financial instrument becomes worthless. - [ ] The initial value of the financial instrument increases. - [ ] A new tenor period starts. - [x] The financial instrument becomes due for payment. > **Explanation:** At the end of the tenor, the financial instrument matures and becomes due for payment. ### Can tenor affect the interest rate on a financial instrument? - [x] Yes, longer tenors typically have higher interest rates. - [ ] No, the interest rate is fixed irrespective of tenor. - [ ] Only in cases of overnight loans. - [ ] Interest rates only affect instrument value, not tenor. > **Explanation:** Longer tenors can indicate higher risks, and thus typically carry higher interest rates to account for the extended period of investment and associated uncertainties. ### How is the tenor specified on a financial instrument? - [ ] By the name of the involved parties. - [x] By the specified period until payment is due. - [ ] By the currency used. - [ ] By the notary approval date. > **Explanation:** The tenor is specified as the period that must elapse before the financial instrument becomes due for payment. ### What term is synonymous with 'tenor' in the context of bills of exchange? - [ ] Face value - [ ] Legal jurisdiction - [ ] Payee name - [x] Maturity > **Explanation:** Maturity is the term that refers to the date on which the payment is due, synonymous with the end of the tenor period. ### Which of the following statements is true about the tenor of a financial instrument? - [x] It cannot be changed without creating a new agreement. - [ ] It can be arbitrarily modified by either party. - [ ] It determines the payee of the instrument. - [ ] It signifies the interest rate of the note. > **Explanation:** The tenor is fixed when the financial instrument is issued and cannot be changed without creating a new agreement. ### In trade finance, how is tenor relevant? - [x] It impacts risk management and cash flow planning. - [ ] It determines the currency of trade. - [ ] It guarantees the rate of return. - [ ] It nullifies the exchange rate effects. > **Explanation:** Tenor affects both the risk management and cash flow planning for the parties involved in the transaction. ### Is the tenor of a promissory note important for its holder? - [x] Yes, it affects when the payment is to be received. - [ ] No, only the interest rate matters. - [ ] Only in specific legal jurisdictions. - [ ] It is irrelevant to the holder. > **Explanation:** The tenor is important for the holder as it determines when the payment will be received. ### What kind of risk is associated with a longer tenor? - [ ] Legal risk - [ ] Short-term volatility - [x] Higher market uncertainty - [ ] Accounting errors > **Explanation:** A longer tenor generally indicates higher market uncertainty and potential risk, as there is more time for underlying market conditions to change. ### What is represented by the term 'tenor' on a bill of exchange? - [x] The period until the bill must be paid. - [ ] The interest rate of the bill. - [ ] The creditworthiness of the issuer. - [ ] The payment currency. > **Explanation:** The tenor of a bill of exchange represents the period until the bill must be paid.

Thank you for exploring the concept of “Tenor” with our comprehensive guide and engaging quizzes. Continue to expand your accounting knowledge for professional and personal growth!

Tuesday, August 6, 2024
Tenure
Tenement
Advice of Obligations on a Bill of Exchange January 1, 1
Aval January 1, 1
Note Receivable January 1, 1
Note, Note Payable January 1, 1
Acceptance Supra Protest (Acceptance for Honour) January 1, 1
Accommodation Bill January 1, 1
Account Statement January 1, 1
Accrual January 1, 1
After Date January 1, 1
After Sight January 1, 1

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