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deposit rates

Glossary

Accrued interest

Accrued interest is unpaid interest that accumulates on the principal balance of a loan.

Annualised rate of return

The average return over a period of years, taking into account the effect of compounding. Also called the compound growth rate. For example, a 100% return over five years is equivalent to an annualised rate of return of 18.2% per year.

Average effective maturity

A measure of a bond's maturity that takes into account the possibility that it may be called by the issuer before its stated maturity date. In this case, the bond trades as through it had a shorter maturity than its stated maturity.

Average maturity for a bond fund

The average of the stated maturity dates of the debt securities in the portfolio. In general, the longer the average maturity, the greater the fund's sensitivity to interest-rate changes, which means greater price fluctuation. A shorter average maturity usually means a less sensitive - and consequently, less volatile - portfolio.

Basis point

One one-hundredth of one percentage point, or 0.01%.

Benchmark

A standard, usually an unmanaged index, used for comparative purposes in assessing fund performance.

Bond (debt security)

An investment issued by a government or corporation that pays a stated rate of interest and returns the face value on the maturity date.

Call Account

An account which gives you immediate access to your money.

Capital Protected

A number of funds offer protection of your capital, ie: they say they will repay your capital no matter what happens to the investment. Investors should be aware this is not a guarantee and protection has a cost which impacts on the overall return.

Compounding Interest

Paid on interest, resulting in a geometric rate of increase on the initial principal. For example, a $100 investment that earns 5% generates $5 per year. With compounding, it would generate $5 the first year, making a new basis of $105; then $5.25 the next year, for a basis of $110.25; $5.51 the next year; and so on. Reinvesting dividends and capital gains takes advantage of the power of compounding.

Capitalisation

The market value of a company's outstanding securities, excluding current liabilities.

Coupon

The interest rate that an issuer promises to pay over the life of a debt security, such as a bond, expressed as a percentage of face value. Normal practice is to pay half the annual rate semi-annually.

Credit rating

An evaluation of the creditworthiness of a debt security by an independent rating service.

Credit risk

The potential for default by an issuer on its obligation to pay interest or principal on debt securities. Most government securities are considered to have very little credit risk.

CDO (Collatarilised Debt Obligation)

These are complex fixed interest funds which tend to offer investors reasonably high returns. However events during 2007 have shown these can be quite volatile and can fall in value quickly.

Debenture

A document setting out the terms of a loan, usually to a company. A debenture may be secured on part or all of a company's assets and often comprises of a fixed charge and a floating charge. The lender is referred to as the debenture holder and is a secured creditor.

Debt securities

General term for any security representing money loaned that must be repaid to the lender at a future date. Bonds, notes, bills, and money market instruments are all debt securities.

Diversification

Spreading investments among many different securities or sectors to reduce the risk of owning any single investment.

Dollar-cost averaging

An investment strategy based on making investments of equal amounts at regular intervals in the same fund or security. Because the shareholder buys more shares at lower prices and fewer shares at higher prices, the average cost of the shares purchased will generally be lower than the average price over the investment period. However, dollar-cost averaging does not ensure a profit or protect against a loss in a declining market.

Duration

A mathematical measure of a bond's sensitivity to changes in interest rates. Duration is stated in years; the shorter the duration, the less volatility you can expect from the bond.

Face value

The value of a bond stated on the bond certificate; thus, the redemption value at maturity. Most bonds have a face value, or par, of $1,000.

Fixed interest rates

Interest rates on protected equity products are fixed but not necessarily for the full term of the loan. Some products have a rate fixed for the full term, others reset the fixed rate each year of the loan term. These resets will reflect the interest rate environment at the time.

Government security

Any debt obligation issued by the government or its agencies.

Government Bond

Treasury's Debt Management Office offers KiwiBonds which are a government back fixed interest security. They are one of the safest fixed interest investments available as they are backed by the NZ Government, however they tend to have relatively low returns.

Historical yield

The actual yield of an investment over a given period, measured from the beginning of the period.

IAM - Interest at Maturity

This is the rate when interest is compounded and paid at maturity.

Internal Rate of Return (IRR)

will tell you soon!

Investment-grade

Investments which have been given a credit rating above a certain level. Any investment below this level is called speculative or a junk bond.

Junk Bonds

Fixed interest offers with credit ratings below certain levels. The cut off levels are Standard and Poor's BBB-, Moodys Baa3. (See ratings Equivalency table). Junk bonds are also called 'speculative grade' investments.

Liquidity

The ability to sell an investment. A liquid investment is considered more valuable than an illiquid one which is difficult to sell.

Maturity date

The date on which the principal of a bond must be repaid.

Money market fund

This is an American term for what we call cash funds.

Mutual fund

This is the American term for unit trusts and managed funds.

Managed funds

An alternative to direct investment, managed funds offer exposure to a broad range of shares, both domestic and international. Investors make a single investment in a fund which is in turn invested across a range of stocks by the fund manager.

MER or management expense ratios

Cost ratios calculated to a standard formula by all fund managers to give investors a comparable standard by which to compare the ongoing fees on funds. The formula combines fees like management investment fees, commissions to advisers, manager administration expenses etc. and expresses them as one simple percentage rate. Multiply the MER quoted for a fund by the amount of capital you have to invest to get an idea of the annual fee the fund manager will charge.

NZDX

This is a market run by the stock exchange specifically to raise and trade debt issues.

Official Cash Rate (OCR)

An interest rate set by the Reserve Bank. The OCR is reviewed every six weeks and a benchmark other interest rates are set off.

Par value

The face value of a bond or share as printed on the certificate. Bonds generally have a par value of $1,000.

Perpetual bond

This is a bond which has no set maturity date.

Ratings

Ratings are an independent measure of the financial strength of a company. The better the rating the less likelihood there is that an investor will lose their money. Each rating company has its own methodology so it is important to understand how the rating is determined. Rating companies include the three big international houses; Standard and Poor's, Moodys and Fitch and some local firms including Grosvenor with its BondWatch service and Axis Ratings which islicensed to use the Rapid Ratings methodology..

Real rate of return

The return on an investment after it is adjusted for the effects of inflation.

Return of capital

A fund distribution that exceeds earned income - that is, a distribution that includes a portion of the investor's original principal. Return of capital is sometimes distributed to maintain the level of the distribution when income is not adequate to do so.

Securities Commission

The government agency created to administer the laws governing the securities markets. The commission is currently headed by Jane Diplock. Its site is www.sec-com.govt.nz

Standard deviation

This measures how volatile an investment's return is. This measurement of historical volatility is often used to help answer that question. It shows the average difference between a portfolio's periodic returns and a benchmark index. The smaller the difference, the lower the standard deviation will be - and the greater the degree of stability you can expect from the fund.

Term Deposit

These are investments, generally offered by banks, which have a set term. The term can be expressed in either days or months. Term deposits, generally, can't be repaid before their maturity date. TDs, as they are known, offer different interest payment frequencies, eg: monthly, quarterly and at maturity. A TD with a shorter interest payment frequency will have a lower overall return than one which compounds the interest and pays it at maturity.

Total return

The return on your investment which takes into account the change in price, plus dividends or interest you receive. The total return for a fund reflects changes in net asset value and reinvestment of all distributions in additional shares of the fund.

Yield

The rate at which a security distributes income, expressed as a percentage of the current price. For example, if a fund distributes $1 per share over the year and at the end of the year the price is $20, its yield is $1/$20, or 5%. Yield is an important measure of performance for income funds and individual bonds.

Yield curve

A graph depicting the relationship between yields and maturity dates for a set of similar securities. These curves are in constant flux, and one of the key activities in managing any income-orientated unit trust is to study trends reflected by comparative yield curves.

Yield spread

The variation between yields on different types of debt securities; generally a function of supply and demand, credit quality, and expected interest-rate fluctuations. Treasury bonds, for example, because they are so safe, will normally yield less than corporate bonds. Yields may also differ on similar securities with different maturities. Long-term debt, for example, carries more risk of market changes and issuer defaults than shorter-term debt and thus usually yields more.

Yield to maturity

The annual return on a bond, assuming the bond is held until its maturity date. Unlike current yield, this takes into consideration the purchase price, redemption value, time to maturity, coupon yield, and time between interest payments.

Zero coupon bond

A security that pays no interest but is instead sold at a deep discount from face value. The holder receives the rate of return through the gradual appreciation of the security, which is redeemed at maturity for the full face value.

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