Begriff

Key Takeaways

• A term refers to the length of time for an asset, liability, or investment.
• It can also indicate the provisions of a contract or agreement.
• Terms can be short-term, intermediate, or long-term for different financial products.
• The term of an investment affects its riskiness and maturity considerations.
• Jay's daily trading, insurance, and rental payments illustrate different uses of the term.

What Is Term?

In finance, "term" refers mainly to the timeframe during which an asset or liability is expected to mature or be fulfilled. Depending on the context, it can describe an investment's lifespan, a debt's repayment period, or the provisions of an agreement or contract. Term affects how products are evaluated; for example, a short-term bond may mature in under a year, while long-term bonds can extend beyond 10 years.

Exploring the Different Types of Terms in Finance

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.12 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.

Practical Examples of Term Usage in Finance

Jay is a day trader. He buys a security on Monday and sells it on Tuesday. The term period of his holding for the security was one day. Jay also has life insurance which has a term period of 20 years, meaning it will mature in 20 years and Jay will get a payout from the insurance carrier. Finally, Jay lives in a rented apartment. According to the terms of his agreement with the landlord, he has to pay rent by the 5th of each month.