The deferral period is a period during which a borrower does not have to pay interest or repay the principal on a loan. The postponement period also refers to the period after the issue of a redeemable security during which the issuer cannot call the security.
Breaking down an adjournment period
The deferment period applies to student loans, repayables, certain types of options and requests for benefits in the insurance sector.
Postponement of loans
The deferment period is common with student loans and can be granted while the student is still in school or just after graduation when the student has few resources to repay the loan. A deferral can also be granted at the lender’s discretion during other periods of financial difficulty to provide temporary relief from debt payments and an alternative to default.
Usually, a newly established mortgage will include a deferral of the first payment. For example, a borrower who signs a new mortgage in March may not have to make a payment until May.
During the loan deferral period, interest may or may not accrue. Borrowers should check the terms of their loan to determine if a loan deferral means they will owe more interest than if they have not deferred the payment. Since student loans are federal loans, unlike private loans, they do not accumulate interest during the deferment period.
Postponement period on redeemable securities
Different types of securities may have an integrated call option allowing the issuer to redeem them at a predetermined price before the maturity date. These securities are called redeemable securities. An issuer will usually call bonds when interest rates in the economy fall, allowing it to refinance its debt at a lower rate. However, since the early repayment is unfavorable to bond holders who will stop receiving credit interest after the withdrawal of a bond, the trust indenture will provide protection by call or a deferment period.
The deferral period is the period during which an issuing entity cannot redeem the bonds. The issuer cannot recall the security during the deferment period, which is uniformly predetermined by the underwriter and the issuer at the time of the issue. For example, a bond issued with a maturity of 15 years may have an adjournment period of 6 years. This means that investors are guaranteed periodic interest payments for at least 6 years, after which the issuer can choose to redeem the bonds based on market interest rates. Most municipal bonds are repayable and have an adjournment period of 10 years.
Deferral of options
European options have an adjournment period for the life of the option – they can only be exercised on the expiration date.
Another type of option, called the deferral period option, has all the characteristics of an American vanilla option. The option can be exercised at any time before its expiration; however, payment is deferred until the option’s initial expiration date.
Benefits are payable to the insured when he / she becomes disabled and is unable to work for a period of time. The deferred period is the period between the time a person becomes unable to work and the time the benefit begins to be paid. This is the period of time an employee must be out of work due to illness or injury before any benefit begins to accrue, and any claim payments will be made.