Term

Reviewed by Sweta | Updated on Aug 27, 2020

Introduction

'Term' refers to the tenure or life of an asset or liability. The term could be a useful life of an asset over which the value gradually shrinks. In the case of money investments, the term refers to the period during which the deposit value increases.

Similarly, in the case of a loan, 'term' may refer to the period of time for repayment of the loan with interest. In a general sense, 'term' may refer to the holding period for an asset or investment.

Understanding Term

A 'term' may be long-term or short-term depending on the nature and purpose of investment, loan and so on. 'Term' also refers to the tenure of an agreement between two or more parties.

The 'term' of an agreement or contract impacts the rights and obligations of the parties and the performance of a contract. A 'term' is also understood to refer to a clause or provision in a contract or agreement.

In the case of investments, the term can range from as short as a few seconds for a day trader to an indefinite period in the case of land owned by an organisation irrespective of its shareholders or investors.

Fixed income products neither have a very short-term nor long-term. If they are short-term, they have a maturity of less than one year. The intermediate bonds have a maturity from two years to ten years, and the long-term bonds have a term of above ten years.

The term of a loan includes the schedule for repayment through equated monthly instalments (EMI). A short term loan's term ranges up to two years. A long-term loan's term ranges from two years to ten years.

The term of security is also associated with the riskiness of the security or financial products. Securities which are short term in nature are riskier. The longer the tenure, the less risky the security.

Conclusion

There are various factors that investors must consider before investing in any financial product. Investors invest considering the term of a prospective investment in addition to the returns and evaluate the risks.

Similarly, any person intending to take a loan considers the tenure of the loan, weigh in the possibility of repaying the loan by calculating the EMIs. The 'term' or 'tenure' is important both from a legal and financial perspective.