What does 'tenor' refer to in finance?

Tenor in finance specifically refers to the duration or term of a financial obligation, particularly a loan or a debt instrument. It indicates the length of time until the principal amount of the debt is to be repaid in full. For instance, if a loan has a tenor of five years, it means that the borrower is obligated to pay back the full amount within that five-year period. This concept is crucial as it helps investors and borrowers alike to understand the time horizon for cash flows associated with the financial instrument.

Understanding tenor is particularly significant in leveraged finance because the length of the loan affects interest rates, risk assessments, and the overall financial strategy for both the lender and borrower. Longer tenors might imply higher risk, potentially leading to higher interest rates, while shorter tenors typically involve quicker repayment periods. Such dynamics are crucial when structuring debt in leveraged buyouts or other financial arrangements.