INTEREST
The price of money, if you are an investor. The cost of money, if you are a borrower. The next part gets a bit technical.
If you invest (or lend) you will be quoted an interest rate your investment will earn (or pay). This quoted rate will be expressed as a percent per year (or per annum, means the same thing). However, what you will be interested in will be the amount of cash you earn for the period you invest for, and this will be affected by whether you have your interest paid out regularly (usually monthly or quarterly), or if it stays in until maturity. Even more importantly, some institutions credit interest monthly, some quarterly or annually, and some do it at maturity. The more often interest is credited, the better your return. The combination of 1) when interest is paid out, and 2) how interest is credited, will have an impact on how much you receive. You may not be able to tell some of these things from the information in this web site, so when you have selected a short list of investments, you will need to check these things with the institutions themselves, or your Adviser. Institutions are under disclosure obligations to tell you this information.
If you borrow, you may be subject to additional costs other than interest. Such costs could include Loan Fees, Credit Insurance, Brokers Fees, Documentation Fees, and the like. You should also check the basis on which interest is charged. For example, is it compounded on a daily or monthly basis? Since the introduction of the Credit Contracts and Consumer Finance Act 2003 (see CCCFA), the finance rate is no longer required to be disclosed on the contract. Instead, the interest rate, how interest is calculated, and how often interest is charged, must be disclosed on the contract. If there is more than one interest rate - for example as with a contract showing an 'interest-free' period, the contract must disclose what interest rate applies for what period.
The effective interest rate is not what is posted on this web site - only your lender can give you this information when all the specific details of your loan are brought together. Also, check this very good backgrounder from the ASB here >>>
ACCRUED INTEREST
The value of interest, up to the day of calculation, that has not been yet paid out to you (if you are an investor) or paid by you (if you are a borrower).
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ADVISER
These are the organisations or people who can analyse your personal circumstances and advise you on your best options. They usually charge fees for this service, and may also receive commissions from the institutions you choose to invest in, or borrow from. You have the right to request a Disclosure Statement which will set out the types of investments they are qualified to give advice on, whether their advice is limited to a specific institution, and if the adviser will receive a payment or commission from the institution you invest with. By law, this Disclosure Statement must be provided within 5 working days.
BOND
A debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing. It is a fixed interest security, which pays a regular return (coupon) over the life of the security. It matures at a fixed date. The coupon rate is fixed from the date the bond is issued. It represents the original interest rate the issuer agreed to pay to investors. This is payable half yearly or quarterly in arrears and can be mailed directly to the registered holder or direct credited to the holder's bank account. This is not necessarily the return you receive on your investment, especially if you have bought your Bonds on the secondary market. The return you receive (yield to maturity) is determined by the premium, or discount you pay for a specified face value of bonds. See also, Perpetual Bond. See also, Kiwi Bonds >>>
BROKERS
These are the organisations or people who arrange loans on behalf of Institutions. They are usually paid for what they do by receiving part of the loan fees, but sometimes they charge the customer all or part of their fee directly. Check with your Broker.
CALL
Money you lend (deposit) to an institution that can be withdrawn at any time. See also, Savings Accounts.
CAPITAL NOTE
Also known as a Corporate Bond. They are a fixed cashflow security issued by a company. Capital notes are unsecured subordinated debt (that is, they rank behind all other creditors of the issuer). A Capital note is essentially a loan to the company issuing them - a loan that ranks ahead of shareholders but ranking behind all other lenders to the company. Capital note holders receive interest on the notes, and they may be traded in the same way as securities on the stock exchange. The company may issue capital notes to shareholders instead of paying them cash when any other capital instrument is surrendered. Capital notes may be held by any person - you do not need to be a shareholder to hold a Capital Note.
At the maturity date, the holder is offered the option of investing for a further period at a new interest rate or converting to ordinary shares. If the conversion option is selected, the issuer has the option to repay the capital note in cash. If the issuer elects for conversion, the face value of the capital note is applied to buying shares at some discount (usually around 2%) to the share price. As redemption for cash is at the issuer's option, capital notes are often regarded as quasi-equity.
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CAPPED RATES
Refers to a special type of mortgage arrangement, a hybrid between Fixed and Variable. Under this deal, your interest rates can fall when Variable rates drop. They can rise when Variable rates rise, but will never go above the Cap Rate, even if Variable rates continue to rise. The Cap is usually set slightly above the equivalent Fixed Rate. A good option to consider, especially if your repayments are about as much as you could possibly afford.
CCCFA - the law
Certain loans now fall under the Credit Contracts and Consumer Finance Act 2003. This legislation replaces the Hire Purchase Act 1971 and the Credit Contracts Act 1981. Covered by the CCCFA are;
• Consumer credit contracts
• Consumer leases
• Buyback schemes
The CCCFA took effect for Buyback loans in 2003, and for consumer leases and consumer credit contracts in April 2005.
Certain criteria must be met in order for a loan to be considered a consumer credit contract, but these criteria would generally be met by any individual purchasing goods from a retailer through an extended finance option such as hire purchase. Revolving credit contracts, credit card contracts and personal loans also generally fall within the definition of consumer credit contract.
The CCCFA has had a far-reaching impact on the consumer credit industry in terms of the changes enforced on the finance companies. The major changes are as follows;
• It is no longer required for a consumer loan to show the 'finance rate'. Instead, the interest rate, how interest is calculated, and how often interest is charged, must be disclosed on the contract. If there is more than one interest rate - for example as with a contract showing an 'interest-free' period, the contract must disclose what interest rate applies for what period.
• All credit fees must meet 'reasonability' tests. This means that the financier is no longer allowed to use fees to bolster the profitability of a low-interest contract - fees must recover costs incurred only.
• All fees that may be charged in the future must be disclosed on the contract - this includes fees related to arrears processing or cancellation of the contract.
• The borrowers right to cancel the contract must be disclosed prominently on the contract - the wording used to disclose the right to cancel is specified by the CCCFA.
CDO - Collateralised Debt Obligations
As the NZ Herald has said,"It's an ugly phrase but one that investors will be seeing more in future. That's because collateralised debt obligations, or CDOs for short, play a big part in a new type of fixed-interest investment that claims to be able to deliver high returns without too much risk." A CDO is like a large diversified fund of fixed interest securities. Often the portfolio is made up of high yielding components, and of course, high yield often indicates high risk. The idea is, however, that not all high risk investments will go bad - in fact most won't - so the risk in such a fund is seen to be minimised for the investor. Diversification is said to offer security. These funds are usually given a Credit Rating, and usually it is quite a good one, and often better than some of the investments included in the fund. These funds may well invest in international fixed interest securities as they can offer better returns than equivalent NZ fixed interest products. But take care to assess the CDO's exposure to foreign exchange risks if they do have a significant international component. CDO's have become the main component of the toxic debt that has knee-capped the international financial system from 2007 onward. Risks in these instruments were vastly underestimated, and they were greatly oversold by financial marketers.
COMMISSION
A broker or adviser's fee for purchasing or selling you securities or a mortgage. It may be paid to the broker by the institution, or by you (or sometimes, by both). It is usually a percentage of the value of the transaction, although a minimum amount may also apply. You should expect and ask for full disclosure of fees and commissions.
COMMERCIAL BILL
An unsecured obligation issued by a company or a bank to finance its short-term credit needs, such as accounts receivable and inventory. Maturities typically range from 2 to 270 days. Commercial bills are available in a wide range of denominations, can be either discounted or interest-bearing, and usually have a limited or nonexistent secondary market. Commercial bills are often issued by companies with good credit ratings, meaning that the investment can have relatively low risk.
COMPOUNDING
Interest compounds when it is earned and credited to your account balance without being paid out - and, the next period's interest is based on that higher balance. In other words, you are earning interest-on-interest. This is a powerful effect, one that makes your savings grow faster, especially over longer periods. The best way to see the impact of compounding is to use one of the calculators on this site here >>>.
It is important, however, to do the calculations on an after-tax basis. RWT reduces the benefits of compounding dramatically, but they remain very worthwhile. If you are offered a rate of 6.5% pre-tax, you need to do your calculations by deducting the tax rate that applies to you from that rate. For example, if your RWT rate is 33%, calculate 33% of 6.5% which equals 2.145%, and deduct that 2.145% from the 6.5%. This gives you an after-tax rate of 4.355% which is the rate you should use when assessing the real impact of compounding.
Always ask the financial institution how often they compound. Many do not compound on deposits of less than 6 months, but some do. Some compound annually, some semi-annually, others quarterly. Some even compound monthly. Compounding is always better for you when done more often.
If you need your interest paid out as soon as it is credited to your account, you will not receive the benefits of compounding. In that case you are receiving 'simple-interest'.
Our term deposit pages list codes for how each institution credits your account with interest, and how soon you can get interest paid out. These codes are explained here >>>.
CONVERTIBLE NOTE
Convertible notes are often described as hybrid securities as they combine features of debt and equity. Convertible notes trade on a price basis in the equity market of the NZX. Unlike capital notes, convertible notes convert into the ordinary shares of the issuer at a set date based on a pre-determined ratio. The coupon payable on these securities is usually paid semi-annually at a pre-set rate.
COUPON RATE
Coupons are the regular interest payments made to bondholders. The coupon rate shows the rate of return that the issuer will pay bondholders each year, based on the bond's face value (i.e. the amount that the issuer agrees to pay at the bond's maturity date). This rate is usually set at the prevailing market interest rate when the bond is first issued. Coupons can be fixed or floating, and either payable in full at maturity or at regular intervals throughout the life of the bond. Most debt securities traditionally have a coupon that is fixed until maturity, is a percentage of the face or principal amount, and pay interest semi-annually.
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CREDIT RATING
The SQP Score © is NOT a credit rating. For information on the SQP Score ©, go here >>>
A credit rating is an important consideration when lending or investing. You take an important risk when you invest money that the institution will be able to pay your interest and return your deposit on the agreed terms. There are a number of credit rating agencies that review an institution's credit and rate it in terms of relative risk. Standard & Poors(*), Moody's, Grosvenor's BondWatch, are examples of credit rating agencies. In very general terms, highly rated credit (NZ Government, the trading banks, etc) give investors lower risk. Some New Zealand deposit takers have no credit rating. Higher risk is usually reflected in higher rates - lower risk in lower rates. To get credit rating information, you will need to check with the institutions you select. This web site does not accept any responsibility that listing on the site implies any credit status. The lack of a credit rating should not imply anything in particular. Seek professional advice when considering relative credit ratings.
Notes: (*) click "Long Term Issue Credit Ratings" for the definitions which are in a pop-up.
LA = Local Authority risk.
DEBENTURE
A formal, legally enforceable claim on a specified asset or group of assets that will revert to the debenture holder's control if the owner cannot meet the terms of the debenture document. A bit like a mortgage, but over the balance sheet assets of a company, and usually not ranked - that is, the debenture holder has first claim over the specified assets, and has legal protection from the owner giving security to others. Note that the security given is only over the specified assets. If those assets turn out to be worth less than originally represented, that change in value is not protected. A Debenture is not a guarantee. It is worth figuring out exactly who has the right to act (ie: who can sell up the assets to recover the investment) in the event of a default by the owner (borrower). The term Secured Debenture means the same thing.
DEFAULT
Failure to meet the terms of a legal agreement (such as a loan). What is 'default' is almost always spelled out in the agreement. Often (but not always) that agreement spells out what a borrower must do to remedy a default, and how much time it has to do it (usually, not long). The agreement will describe what happens when default takes place.
DGS - RETAIL DEPOSIT GUARANTEE SCHEME
In October 2008, the NZ Government announced that all retail deposits in all banks, building societies, credit unions and finance companies (that are not in default of their trust deeds) will be guaranteed by the state, provided each institution meets minimum benchmarks for coverage. Our term deposit pages note the status of each insitution under this program. There is a limit in the amount protected of NZ$1 million per person in each insitution.
There are restrictions on who is covered, but generally NZ residents are covered for deposits in all approved institutions, while people living overseas are only covered when their dposits are in NZ registered banks.
Full official details of the Retail Deposit Guarantee Scheme can be found here >>> Check the "Questions and Answers" pages for more details on how the scheme works.
Institutions who have been approved for guarantee coverage are noted on our pages with this logo 
This state guarantee is scheduled to end for all institutions on 12 October 2010.
ESTABLISHMENT FEE
The fee charged by the Lender to set up a loan. (Also sometimes called the Application Fee.) It is usually negotiable.
Establishment fees on loans governed by the CCCFA must be able to meet a 'reasonability' test. The CCCFA says Establishment fees can include only "costs incurred by the creditor in connection with the application for credit, processing and considering that application, documenting the contract, and advancing the credit; but does not include any fee or charge to the extent that it is a charge for an optional service". This means that the Establishment fee cannot include, for example, a charge for account maintenance, because it is not part of the process of applying for credit, assessing the application for credit, documenting the contract and advancing the credit. There is a strong implication, not yet tested in court, that the establishment fee cannot be calculated as a percentage of the loan - because the creditor's costs associated with the application for credit and contract documentation should be relatively fixed.
FACE VALUE
The value of a bond that the issuer promises to pay the holder (investor) at the maturity date. The Face Value should not be confused with the Market Value, which is determined by many other things, such as the current yield, the credit rating, and supply and demand. Your purchase price of that bond, even at original issue, may differ as well.
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FLOATING RATE
Also known as Variable Rate. The interest rate charged on a mortgage that changes whenever your institution wants it to - almost always because of market or competitive pressures. For existing borrowers, this rate can go up 'promptly' in response to market changes, but tends to fall much more slowly. Each time it changes, you do not necessarily have an automatic right to switch to a fixed rate - to do that you will have to enter into new negotiations with your institution (and possibly pay new fees). When considering a Variable or Floating rate, make sure you understand what will happen to your payments when the rate changes. Will your a) payments go up or down? or, b) term of loan be lengthened or shortened? In both cases, each option can have a dramatic effect on the total amount of interest you will pay over the life of the loan.
FINANCE RATE
Since the introduction of the CCCFA, the finance rate is no longer required to be shown on consumer credit contracts. Instead, consumer credit contracts must show the interest rates that apply to the contract, what periods of time those interest rates apply to, how the interest is calculated, when interest is charged, and what fees do or may apply.
It is generally agreed that the finance rate was too complicated to be of any real use to consumers, not least because the finance rate was calculated at the end of the loan application process. The changes brought about by the CCCFA make the comparison of different offers easier for the consumer, although there are still many ways of charging interest - the current legislation does not prohibit financiers from using an unorthodox interest calculation, as long as the credit contract clearly discloses the calculation method.
FIXED RATE
Used to describe mortgage interest. Means that the interest rate you agree with the institution will apply unchanged for the Term that the fixed rate applies for. It is important that when you enter into a Fixed Rate agreement that you ask and understand what happens at the end of the term. Most Fixed Rate arrangements provide for a default roll-over if you do not advise your wishes within a certain time period. And it is possible [significant] fees may apply if you wish to change those standard arrangements at the end of the fixed period. Make sure you understand and agree to those arrangements before you sign up.
Generally, Fixed Rate mortgages are less flexible than Variable Rate ones. You usually cannot make extra repayments (sometimes called lump-sum payments), or repay early, without incurring some sort of interest penalty.
HOME EQUITY RELEASE MORTGAGE
Sometimes referred to as a reverse annuity mortgage. What makes this type of mortgage unique is that instead of making payments to a lender, the lender makes payments to you. It enables older home owners to convert the equity they have in their homes into cash, either in the form of monthly payments, or in the form of lump-sum payments. Unlike traditional home equity loans, a borrower does not qualify on the basis of income but on the value of his or her home. In addition, the loan does not have to be repaid until the borrower no longer occupies the property. We strongly recommend seeking professional advice before you commit to this type of arrangement.
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HY-FI
Literally, High Yield Fixed Interest investments. And means just that.
INSTITUTION
Includes banks, mortgage companies, trustee companies, credit unions, building societies (but does not include advisors, brokers, or this web site). These are the organisations who will actually give you the loan, or pay interest on the funds you invest.
KIWI BONDS
Kiwi Bonds are securities offered by the government to individual New Zealanders. They are a simple form of investment, similar to a term deposit in that they offer a fixed rate of interest for a given term. Terms available are six months, one year or two years. The minimum amount that may be invested is $1,000.
The interest rates offered are generally lower than those offered by banks, reflecting the greater level of security associated with a government investment. The interest rates are set periodically by the Treasury, based on the moving averages of domestic wholesale interest rates (i.e., interest rates for government bonds and Treasury bills).
Kiwi Bonds are available only to New Zealand residents. Anyone resident outside New Zealand, even if they hold New Zealand citizenship, is ineligible to invest. For more information, and how to buy kiwi bonds, check here >>>
KIWISAVER
It's the government's attempt to get us to save for retirement. Every New Zealander under the age of 65 will be able to open a Kiwisaver account from 1 July 2007. This program comes with its own set of jaron, and a good place to understand that is here >>>
LENDING LIMIT
See LVR
LVR
Stands for Loan-to-Value Ratio and is used in mortgage negotiations. Institutions generally won't lend more than a percentage of the value of your property. The difference between what you pay, and what you borrow, is the funds you will have to come up with on your own (these funds are called your Equity). But your mortgage lender doesn't really care what you paid for your property - they want to know what it's real market value is. And it is this Value that becomes the benchmark for what they will lend to you. To determine that value, they will normally insist that a professional valuer make an assessment and write a report. Based on that report, they will apply a formula (say, 80%) and that is the maximum value of the Loan they will offer. That percentage (or Ratio) is the LVR.
While some insitutions work on a 50% or 60% ratio, the traditional ratio has been 66% ('two thirds borrowed, one third equity'). These days it is more standard to be 75%-80%, with many going to 90%. But always remember, the technical Value of your property may not necessarily be the same as what you paid. And Value is typically after deducting the real estate agent fees. At the end of the day, the institution wants to be satisfied that if you default and your property has to be sold, there will be enough left over to comfortably repay the mortgage and their costs. Remember, they have legal security over your property.
MANAGED FUND
A syndicated form of investment where a manager invests funds on behalf of a group of investors - Also called a Unit Trust. Managed funds are often very large, and can invest in many more areas than a single investor could.
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MEZZANINE FINANCE
A jargon term which you will see and hear in reference to what a lender invests in. Essentially, it is a low-ranking mortgage, usually provided to a property developer to help fund a project. It is high-cost funding for the developer (high-yield for the lender) because it ranks behind a first mortgage of the property, and usually ranks behind a second mortgage. Often it is a third or even fourth mortgage. We recommend that you investigate thoroughly if you invest with a lender who provides mezzanine finance. The rationale for this type of borrowing/lending is that it is often short term, for enough time to complete and sell the development, and therefore even though the percent interest cost is high, the time-risk is short, and the dollar interest cost is in proportion to the development. The providers of mezzanine finance often take significant fees to make such a loan.
MONEY MARKET
The best way to understand the NZ money market (also known as the NZ debt market) is to check this web site http://www.nzx.com/nzxmarket/nzdx. This is a public market where you can trade debt securities issued by the NZ Government, State-owned enterprises (SOEs), local authorities, and NZ corporates.
MORTGAGE
A term loan you borrow secured by real estate property. Rates of interest may differ for home buyers, purchasers of investment property, or businesses. Interest rates listed on this site usually apply only to home buyers. There are many different types of mortgages. Check your options with your adviser or broker. See also, Reducing Mortgage, and Table Mortgage, below. (Strictly speaking, the 'mortgage' is the legal document that secures the property for a loan.)
MORTGAGEE SALE
As a last resort, if you cannot repay the loan on the terms you have agreed with the lender, the lender can sell the property to recover what you owe, including the costs of enforcing this sale.
NON-RESIDENT WITHHOLDING TAX (NRWT)
Financial institutions in New Zealand are legally required to deduct withholding taxes from the interest you earn on term deposits. [If you are a New Zealand resident, see WITHHOLDING TAX (NZRWT) below.] If you are not resident in New Zealand, the rate of NRWT that applies is 15%, reduced to 10% if you live in a country that has a double taxation treaty with New Zealand. Countries with tax treaties with New Zealand include Australia, China, almost all of Western Europe, Indonesia, Korea, Taiwan, Thailand, United States. A 10% withholding tax applies to residents of these countries.
Among those without a treaty at this time are Canada, India, Japan, Malaysia, Singapore, and a 15% rate applies to residents of these countries.
Before making any decisions, check with your tax advisor. Note that tax is deducted on the gross interest earned - no 'expenses' can be deducted in determining NZ NRWT. Depending on the tax rules in your home country, you may well be able to claim the New Zealand withholding tax as a deduction from your home country income. Again, check with your tax advisor. You can get the official New Zealand story from http://www.ird.govt.nz/nrwt/
NOTE
A short-term debt security, usually with a maturity of five years or less. Also, a legal document that obligates a borrower to repay a loan at a specified interest rate, either during a specified period of time, or on demand. Also called a promissory note.
PIE
A Portfolio Investment Entity ("PIE") is a special tax investment entity type that a managed fund can apply to become. IRD information on these entities is here >>>
A review from the Dominion Post explains these tax advantages >>>
PIEs pay tax based on the applicable rates of tax advised by the investors in the fund. The top rate of tax that can be applied is based on the company tax rate of 33 per cent (which is being reduced to 30 per cent from April 1, 2008).
PERPETUAL BOND
A bond that has no maturity, or expiration date. The issuer can only redeem the bond by purchasing it from the holder on the secondary market.
REDUCING MORTGAGE
A mortgage where you pay off the same amount of principal each month or fortnight. This means that the loan reduces by this amount each time, and therefore the interest charged is slightly less each time. Repayments start off high but reduce over the term of the loan.
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REFINANCE
Changing the terms of your loan, or replacing your existing loan with a new one. Refinancing is often associated with going to a different provider. You may choose to do this because you would benefit from choosing another mortgage repayment option ie moving from a fixed to a floating rate or vice versa. Or, you may wish to change the amount you pay each month on your loan. There may be a cost charged by the lender if you choose to refinance within the term of your loan.
REVOLVING CREDIT
This is a loan facility secured by real estate property. It is designed to be relatively long term funding. Its key attractiveness is its flexibility. For that flexibility, you will tend to pay a higher interest rate than for mortgage finance, and there may be monthly fees as well.
You need to have considerable self-discipline to make a revolving credit arrangement work for you. If you don't, you could well find you owe as much at the end of the term as you did when you started. Make sure you fully understand how this facility works, and how you are going to pay it off.
Revolving credit arrangements come in many varieties. Only the financial institution can give you the specific details of their plan. Benefits include the immediate access you get to funds, up to the pre-approved limit. You can usually draw down* any amount at any time, without having to get specific approval for each withdrawal. This makes Revolving Credit facilities very suitable when you are building a home, buying a major item like a car or boat, or even financing a wedding. Many plans give you access via a cheque book, debit card, phone, internet, or a combination of these. You usually pay interest on the daily balance you have drawn.
In addition to the interest rate, you need to check the institution's rules or requirements for fees for the unused portion of the facility (if any), transaction fees when you draw down (if any), whether there are any limits to the number of times you can draw down per month, when the facility limit changes, whether you can have an interest-only period. Depending on the plan, you will be required to pay down more than the interest if you have a sinking limit and you are fully drawn. You may well have to have your main source of income credited to your revolving credit account as part of your repayment arrangements. There will be a period limit for the facility, and arrangements need to be set in place for paying off the amounts you borrow. [* The term 'draw down' means the same as 'borrow'.]
SAVINGS ACCOUNT
Money loaned to an institution that is not on a fixed term. Each institution has its own rules and procedures for savings accounts. See also, Call.
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SECURITY
A formal agreement protecting an investment by a lender. Includes a Mortgage, a Lien, or a Guarantee - and there are many other types of security. In the first instance, it is not the asset itself that is the 'security', but the document that gives the lender the right to persue the named asset, and if the conditions of the security document are not met, then to assume control of the asset for disposal to pay any outstanding monies, plus the costs doing all this. If there is money left over, it will go to the owner, but note that there is no strict obligation on the part of the security holder to get the best return, or highest price for that asset. All the security-holder wants to do is recover their outstanding monies and their costs.
If the sold-up assets do not cover the full outstanding debt, the borrower may still be liable for any shortfall, depending on the security agreement. The value of the underlying assets of any security and how easily they can be turned into cash quickly (that is, liquidated), is the true value of any security.
SECURITISATION
The securitisation process is a means of creating a liquid market for assets such as mortgages and credit card loans, which themselves are illiquid. The process can also be used to improve the liquidity of bonds. Essentially, the program manager creates a trust as the vehicle to do this. This entity then buys a specific pool of assets (eg: mortgages) that are all of similar quality and with a steady income stream. The trust entity issues debt securities to finance the assets purchased, and the income stream pays the investors over the lifetime of the securities. It is normal for the process to be rated by at least one major rating agency, as this helps greatly with the marketing of the securities issued.
SUBORDINATED DEBT
Refers to debt that ranks below all other debt with regard to claims on assets or earnings. In the case of default, creditors with subordinated debt wouldn't get paid out until after the other debt holders were paid in full. Therefore, subordinated debt is more risky than unsecured debt and other unsecured creditors. It is very important you understand where in the order you will stand in the event of default, before you invest in such debt instruments. Some regulators, and some trustees, will regard subordinated debt as equity (or "quasi-equity"), in their calculations of capital adequacy. As risks are higher for such instruments, ensure the higher interest rate you receive is comensurate with that risk.
SWAP - INTEREST RATE SWAP
An exchange of interest payments on a specific principal amount. An interest rate swap usually involves just two parties, but occasionally involves more. Often, an interest rate swap involves exchanging a fixed amount per payment period for a payment that is not fixed (the floating side of the swap would usually be linked to another interest rate, often the LIBOR). In an interest rate swap, the principal amount is never exchanged, it is just a notional principal amount. Also, on a payment date, it is normally the case that only the difference between the two payment amounts is turned over to the party that is entitled to it, as opposed to exchanging the full interest amounts. Thus, an interest rate swap usually involves very little cash outlay
TABLE MORTGAGE
The type of mortgage where the scheduled repayment amounts are the same throughout the term of the loan. A larger portion of your repayments go towards interest initially, moving to more for principal towards the end of the term. BUT, if the interest rate changes, the repayment amount will be recalculated, and the total payment will change.
TERM DEPOSIT
Money loaned to an institution for a fixed period of time. You cannot get these funds back until the end of the term (although in some circumstances you can after paying a substantial penalty).
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UNIT TRUST
A type of managed fund. Managed funds work by pooling money from a number of investors and then using this money to buy a variety of investments. In a unit trust, each investor owns a proportion of the total fund.
URIDASHI
Uridashis are bonds sold to Japanese retail investors but denominated in currencies other than yen.
VARIABLE RATE
See Floating Rate above.
WITHHOLDING TAX
Also known as Resident Withholding Tax (NZRWT). The amount the IRD takes from investment interest as prepaid income tax. You are required to give the institution your IRD number, or else a punitive withholding tax is applied by the IRD. Unless otherwise stated, all rates on this web site are before tax, and before any other charges.
You can get the official story from the IRD at http://www.ird.govt.nz/rwt/rwt-about/
YIELD
The effective interest rate you will achieve after accounting for the price you paid for the investment, the actual term you hold it for, your costs of acquiring and selling it in the secondary markets (if any), and how/when interest is accrued and paid to you. It may well be different to the advertised interest rate, or the bond coupon rate.
The "current yield" is the cash flow you receive from a debt security. Current yield is calculated by dividing the coupon payment by the purchase price.
The "yield to maturity" is the return (effective interest rate) which you will achieve on your investment if you hold it to maturity. As debt securities are purchased and sold in the secondary market, the yield will differ from the coupon rate, as interest rates change. To calculate the "yield to maturity", the bond pricing formula assumes the coupon interest is reinvested for the life of the stock - so be careful of this assumption if you do not intend holding it to maturity, and especially when rates are generally falling.
ZERO COUPON BOND
A bond that pays no interest (no coupon interest), but is issued at a discount to its Face Value, the difference being the return the investor will receive for holding it. |
