Financial Dictionary

The benchmark is an index or financial reference point, which is used to make comparisons or measure how an investment performs, to analyse a fund's performance and management over a certain period of time.

The beta of an investment fund measures the variability or sensitivity of the fund's return compared to the variability in the benchmark's return caused by market fluctuations.

Cadastral value is an administrative indicator often referred to as a home's ID number. It is determined objectively for each property based on the Land Registry records.

This indicator is used to register the home in the cadastral records, and to calculate many of the annual taxes payable by home owners, including property tax (IBI). This is why the cadastral value is a unique, mandatory, individual and free value identified with a specific property.

It is the increase in value produced by the difference between the purchase price and the higher sale price of units of stock in an investment fund.

How does taxation work for investment funds?

The capital gain is recorded by a series of taxes, the main tax being personal income tax (IRPF) but, despite this, it should be noted that the tax advantages of investment funds are one of their main advantages over other types of investments.

In financial terms, 'capital losses' refers to the loss of value that occurs as a result of the difference between the purchase price of the shares in an investment fund and their sale at a lower price.

Certificates of zero outstanding debt are documents that show you no longer have a mortgage with the bank or financial institution. They are usually requested when we have just paid off the mortgage and want to remove it from the Land Registry.

Now we know what a certificate of zero outstanding debt is, the next questions usually are: Do you have to remove the mortgage from the Land Registry? Where do I get or administer a certificate of zero outstanding debt?

Contactless payment is a technology that allows card payments using NFC (Near Field Communication), by establishing a wireless communication and data exchange practically instantaneously between two devices that are only a few centimetres apart.

NFC technology has been applied to both cards and POS terminals, so that the devices can communicate with each other by sending and receiving information in real time. This communication between the card and the sales terminal allows payment just by bringing the card close to the POS.

A credit card is a plastic or metal card issued by a financial institution or a bank that authorises its holder to use it as a means of payment.

Credit cards allow cardholders to make purchases and withdraw cash even if they do not have funds in their account, unlike debit cards. Debit cards purchases are charged to the current account associated with the card immediately. There must be sufficient funds in the account or the payment will be rejected.

There are two payment methods for credit cards:

• Payment at the end of the month
  This is perhaps the most common. All purchases and payments during the month are charged to the cardholder's account at the start of the next month. As with debit cards, the bank does not charge interest.
• Instalment payment
  As their name suggests, credit cards extend credit that can be used to postpone purchases or payments. The bank collects interest with this payment method, as with any credit or loan.

The CVV (Card Verification Value) code is a number usually found on the back of credit, debit and charge cards. It is used in transactions where the credit card is not physically present, usually in on-line transactions.

The CVV comprises three digits and is located on the back of MasterCard and Visa cards. The code is located on the front of American Express cards and has four digits.

The CVV security code has several names: CVD (Card Verification Data), CVV (Card Verification Code), CSC (Card Security Code) and CVVC (Card Verification Value Code).

A debit card is a plastic or metal card issued by a financial institution or a bank that enables us to perform various financial operations.

The most common debit card operations include use as a means of payment. Unlike other cards, debit card payments are charged directly to the cardholder's current account. And unlike credit cards, you must have sufficient funds in the associated account for the payment to be accepted.

Fee received by the depositary of an investment fund for its depositary and custodian services. Only authorised entities may perform this service.

Depreciation and amortisation are economic and accounting terms, linked to the process that exists between the expense or depreciation of an asset, over a period of time.

The depreciation or amortisation of an asset is directly related to the goods and services: a house, a motorbike, a boat, a household appliance, etc. While the amortisation of a liability is related to the financing provided by a creditor and represents what the person or a company owes to third parties. A very common example has to do with loans we obtain from banks, payments to suppliers, taxes, salaries, etc.

First-in, First-out

This is an accounting valuation method used to calculate the value of an inventory, or similar units, in relation to its cost and sale price. This inventory may be the company's products, the raw materials it uses for its work, or the components necessary to carry out this activity in the normal way. The FIFO criterion is commonly used when valuing inventories made up of expired or perishable products. It confirms the necessary order so that all the items that enter first, are released as soon as close as possible to their expiry date or obsolescence period.

Fixed income instruments are financial products whose returns (constant or variable) are defined when they are issued. The price, coupons/interim payments and final redemption value are all determined on the issuance date. During the life of the bond, securities will vary according to fluctuations in the interest rates. Fixed-income securities represent a proportional part of a loan to a private enterprise, public institution or government. The owners of the securities become creditors in proportion to their contribution.

A mortgage floor is a clause regulating the minimum interest rate for a variable-rate mortgage. These clauses are triggered when the benchmark index (Euribor) plus the spread is below a particular value.

High yield bonds, also known as junk bonds, are fixed-income securities issued by a company or country with a low credit rating and they tend to be rated below the investment grade. These types of bonds are characterised by a high risk of default on both interest and the principal, but they offer higher return.

The information ratio measures the relationship between the performance spread of a fund or portfolio over its benchmark, and the management risk assumed by separating it to a greater or lesser extent from the benchmark, also known as tracking error.

The interest rate is the amount banks and financial institutions pay to their customers for the capital they invest for a period of time. From the opposite perspective, it is the price we have to pay for using money lent by a bank. Interest rates are always reported as a percentage of the capital lent by the bank or invested by the customer.

There are different types of interest rates. The most common are those set by the banks in each country for mortgage and personal loans, and for interest on bank deposits.

'Investment grade' refers to the group of credit ratings that imply a low default risk (from AAA to BBB-). Companies with a rating in this range will issue debt at a lower interest rate than others with a poorer credit rating, allowing them to obtain financing more cheaply. 'AAA' is the highest credit rating and it is only granted to countries or companies with an extremely strong capacity to meet their financial commitments.

When we talk about investment policy in a fund, we are referring to the investment vocation of an investment fund (fixed income, equity, mixed fixed income, mixed equity, absolute return, etc.).

In an investment fund, since funds are assets without a legal personality, made up of individual contributions from different investors, when you invest in a fund, you do not acquire actual shares, but units in that fund. These units represent the investment made by each co-owner or unitholder, all of whom have owernship rights over the fund.

The internal rate of return applied to investing in financial assets refers to the discount rate that makes the net present value zero for all collections and payments derived from the subscription and possession of assets where the assumption is that these collections and payments will be reinvested or financed, respectively, at the same interest rate as the rate calculated, until maturity. For fixed-income instruments it is similar to the AER for deposits.

Fee charged by an investment fund manager for the services provided. This fee is deducted daily from the fund's net asset value and is generally a percentage of the assets. Some funds also include a success fee that is applied to the fund's performance. The amount is stated in the fund prospectus.

This is the minimum amount needed to be able to invest in any financial product (fixed income, investment funds, ETFs, etc.) for the first time.

This is important information to bear in mind because if you transfer capital from one investment fund to another and the amount transferred is less than the minimum contribution required by the destination fund, the transfer may be declined.

Mortgage clips or swaps are a type of financial exchange contract, through which benefits are exchanged between the financial institution or bank and the customer.

These agreements can be signed at any time during the life of the mortgage, through a separate document in which the borrower ensures the maximum and minimum interest rates they will pay during the period of the financing. The bank undertakes to pay the difference when the Euribor exceeds the agreed limits;, but the borrower is responsible for compensating the difference if the Euribor is below the agreed limits.

The net asset value is the value of each unit in an investment fund.

When we decide to invest in an investment fund, we are buying units in that fund; i.e. a piece of the cake. These units have a specific price, which is what we call net asset value. This tells us the performance of the investment fund's returns.

NFC stands for “Near Field Communication”. This technology allows practically instantaneous wireless communication and data exchange between two devices that are less than 20 cm apart.

At first glance, the only difference between an NFC card and other cards is the easily recognisable symbol on one side: Four concentric waves.

Practically all banks now incorporate this technology into their cards, ATMs and POS systems.

The NIR (Nominal Interest Rate) is the fixed percentage you pay to the bank solely as interest on the loan; it is the interest rate agreed between the customer and the bank. The NIR is a percentage indicator of the return for the bank of lending the money over a particular period. The NIR transparently shows the amount of interest payable on transactions such as deposits, personal loans and mortgages, depending on the chosen repayment period.

When you apply for a loan or credit, whether for yourself or a company, the bank must provide you with the repayment plan you have to comply with. This repayment plan will include a range of variables, such as the repayment period, the instalments to be paid each month, the type of fees and the percentage interest rate established when the loan was agreed.

Management system where the aim is for the managed assets to mirror the market performance by building a portfolio that replicates the index. and this type of management is therefore also known as indexed management.

Pledging consists of immobilising monetary assets or fixed income securities as collateral in order to obtain a financing percentage on that immobilised amount, that is, we speak of pledging to refer to a real property security.

A portfolio is a set of financial assets and investments that make up an investment fund, a person or an entity's assets.

This portfolio is also called securities portfolio and it can be made up of a combination of variable income and fixed income financial instruments. Depending on the instruments it includes, its profitability will vary.

This involves selecting the optimum return/risk combination for each investor. The investment process is therefore based on analysing the investor's risk tolerance, selecting investments and executing buy and sell orders for specific securities.

The Pre-contractual Information Sheet (known in Spanish as the FIPRE) is a transparent, generic information document that banks are obliged to provide to customers who request information about mortgages. The content of this document is regulated by legal regulations, which have been in force since 2011. It provides personalised information about the mortgage loan, the generic terms and conditions, the interest rates applied and any related products.

A prepaid card is a type of debit card that allows you to load a certain amount of money for purchases and payments until it is used up.

The limit for these cards is the amount of money loaded onto them. Once this amount has been used, you can decide to top it up. These cards are usually loaded with small amounts for everyday purchases.

Like other cards, prepaid cards can be physical or virtual. With virtual prepaid cards, the user is given a card number and a CVV code for each purchase they are going to make, but they never have a physical card.

If you are thinking of buying a home, you need to understand the legal situation of the property before paying a deposit or signing a deposit contract, to avoid any surprises during the purchase.

The property registry filing is an information document that you can obtain from the Land Registry. You need to inform the Registry that you have a legitimate interest in buying the property to get this document.

Stamp Duty and Asset Transfer Tax, better known as the ITP, is a tax on asset transfers for consideration, corporate transactions and documented legal acts.

It is applied to purchases and rentals of homes and second-hand vehicles, and to capital increases and decreases for companies. Stamp duty is applied directly to the public property sale or mortgage deed.

A fee that the management entity may charge the unit-holder when it purchases units in an investment fund. The Fund prospectus or the quarterly report will state the amount.

It is used to see what position the fund has in terms of return obtained compared to other comparable funds.

Quartiles represent sets of 25% of the funds in the total list of funds of a specific category, grouped according to descending profitability. This means that the first quartile comprises 25% of the best funds with the highest profitability, ordered from highest to lowest, and so on and so forth with the second, third and fourth quartiles. Occasionally, larger partitions are used, such as deciles (10%) and centiles (100%).

A fee that the management entity may charge the participant when it sells its units in an investment fund. The Fund prospectus or the quarterly report will state the amount.

Repayment of principal is the return of the money applied for as a loan or credit. When you repay a loan, you are usually paying off both the money you borrowed from the financial institution and the associated interest.

Let's begin by explaining revolving facilities. A revolving facility is a credit line granted by a financial institution that can be drawn on up to its limit over a specified period of time. Revolving cards work in a similar way to credit cards: you can buy things with them and pay them off bit by bit. As you repay or“ replenish” the money, you can spend it again.

The Sharpe Ratio is the return offered by an investment for each unit of risk borne. The Nobel laureate for Economics, William Sharpe, was in charge of developing it, seeking to discover whether the profitability of an investment has to do with having made an intelligent decision or with having assumed greater risk. This ratio calculates profitability based on risk.

Stamp duty (AJD, for the Spanish acronym) is often known as the mortgage tax. It is applied to notarised deeds legalising the commercial and administrative documents involved in mortgage loans.

Stamp duty is regulated by Legislative Royal Decree 1/1993, of 24 September, under the Property Transmission Tax and Stamp Duty Act.

The TER measures the total costs of an investment fund. On top of management and deposit fees, it also includes certain operating and administrative expenses, legal costs, etc., incurred by the investment fund. The TER is public and can be consulted in the information provided by the manager and/or marketer. Investment funds are legally bound to stipulate their main fees in the official fund prospectus regulated by the CNMV.

The duration of a bond is a measure of the average maturity weighted by all the cash flows paid by the bond. In an investment fund, the duration will be the weighted average of the durations of all the bonds that make up the fund. Duration is also used to measure the sensitivity of the bonds in a fund to changes in interest rates. The longer the duration, the greater the price sensitivity to interest rate fluctuations in the market.

A total payment holiday allows the borrower to defer repayment of the loan instalments for an agreed period of time.

Payment holidays are a resource that can be useful in certain very exceptional circumstances, as they have repercussions for the future repayment of the loan.

This measures the deviation of a fund from the benchmark index as result of the securities selected. Tracking error is also used to measure the probability that a portfolio will diverge from the benchmark.

It is commonly used to analyse the regularity of a fund's returns and is a clear indicator of good management by the management team.

In stock market terms, weighting refers to the weight of a specific asset with a group of selected assets, usually an index.

Unit holders are the investors in a fund, whether individuals or legal entities, who contribute their money to an investment fund and are therefore owners of it. Their ownership rights are represented by the book entry system.

Usufruct means“ the real right of use and enjoyment of a thing or property belonging to another”. Article 467 of the Spanish Civil Code defines usufruct as: “the right to enjoy the property of others with the obligation to preserve its form and substance, unless the title of its constitution or the law authorises otherwise”.

Value at Risk“”, also known as VaR, is a statistical method for quantifying exposure to market risk. VaR measures the maximum possible loss expected for a fund or portfolio with a probability rate of 95% in a specific time frame. It is used to anticipate and control the level of risk exposure based on past performance. The investment policy of certain managed funds and portfolios takes into account the maximum VaR levels.

A virtual card is a financial instrument designed for making online payments without needing to present a physical card. Virtual cards have the same elements as physical cards, with the main difference that there is no physical card.

As with conventional cards, you need to know the identification number, expiry date and security code or CVV to use this type of card. Additional validations are often required when using these cards, such as confirmation with an SMS code or PIN number.

Volatility measures the fluctuation of a variable. In financial terms, this variable is related to market prices and its deviation over a specific of period of time is calculated.

A wallet card or electronic wallet is a prepaid card onto which users loads cash for small purchases.

The amount stored on these cards is usually small since, as their name indicates, they act as an alternative to cash, although they have many other benefits. These include:

• Greater control over small purchases
  Once the amount loaded has been spent, the card cannot be used until it is topped up.
• Security
  It is safer than cash, if it is lost, for example.
• Time saving
  Transactions are immediate. And you never have the common problem of lack of change in shops.
• Convenient
  Because off their speed of payment and ease of use.

Zero clauses are mortgage contract conditions in which the bank ensures that the minimum interest it charges is 0%. This means that the total interest charged never falls below this value, even if benchmark rates are negative.

Zero clauses insure banks and financial institutions against reductions in benchmark interest rates, usually the Euribor.