Financial Dictionary

Just having debts with various creditors can sometimes be worrying. That is why there is an option to combine or pool our loans into one. This results in a single monthly payment that is smaller than the total of the instalments on all the separate loans. This is possible because it increases the repayment period (i.e. the total final cost), generating more interest.

A bank account is a banking product where the account holder or holders sign an agreement with a financial institution that allows them to manage their money using the tools its offers without having to have it in cash.

A bank transfer is a transaction through which a person or entity (the payer) orders funds to be sent to the account of another person or a company (the beneficiary).

To order a transfer you need to know the beneficiary's IBAN, which stands for International Bank Account Number.

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.

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.

This is the most commonly used system for calculating loans and mortgages. As the name implies, the repayments are constant. This means that all of the repayments are the same throughout the life of the loan, unless the interest rate changes. This is also known as the French system.

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.

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.

A current account is a type of demand deposit that lets customers deposit an amount of money with a bank, with the money being available to them whenever they want through cash withdrawals from the bank's branches or ATMs, or through card payments.  

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.

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.

A deposit account is a form of demand bank deposit that allows customers to earn a return on their savings, as they deposit money with the bank which pays them interest in return. The returns are determined by the period during which the money is deposited with the bank.

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.

IBAN is the acronym of International Bank Account Number. It is a unique code that identifies every single current account in the 34 countries that belong to the single euro payment area (SEPA).

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.

An interest-bearing account is a type of bank account that pays the customer an interest rate in exchange for them depositing their money at the bank.

The return and interest rate offered will vary by bank and depend on the account terms and conditions. They can also change over time. This interest rate is payable on the account balance over a fixed period of time. There is typically no minimum amount of money needed to open an interest-bearing account, although the more we place in the interest-bearing account, the better the return.

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.

'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.

A mortgage is a security instrument that allows the buyer to receive a certain amount of money from a financial institution in exchange for a commitment to return the amount loaned plus the corresponding interest in periodic payments.

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.

When buying a house we need to do our sums first, as there are more costs than just paying for the house. These basically fall into two groups: The costs caused by the purchase and the mortgage costs. These can amount to 10% of the price of the house, so it is important we have the savings to pay them. And, in addition to that 10%, we also have to cover another 20%, which is the part of the house price that the bank won't cover, as they usually only lend up to a maximum of 80%.

A grace period of a mortgage is the period over which, as holders, we stop paying the monthly instalments on the loan without incurring a penalty for late payment (meaning total grace), or where we pay interest only, thus reducing the instalments significantly (in which case it would be partial grace).

This mortgage situation involves the bank postponing mortgage repayments for a period. It basically involves a delay in repayments, and is subject to a specific period and certain terms and conditions. There can be many reasons for these, but they are mainly related to situations that affect the customer's payment capacity. They are subject to certain acceptance conditions. In more exceptional cases, the government or responsible authority may be in the lead on the moratorium. This is the case in the current situation caused by COVID-19).

Cadencia is when the bank reviews the interest rate payable on variable-rate mortgages. Of course this will not happen if we arranged a fixed-rate mortgage, since we will always pay the same instalment, regardless of the market performance.

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.

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.

An online account is a type of bank account that the customer opens online using the bank’s website or app. The contract between the customer and the bank is signed over the internet.

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.

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.

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.

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.

Remortgaging is an agreement that modifies the terms of the mortgage contract. We might request if we are unhappy with the terms of our current loan (interest, fees, linked products, repayment period, or other clauses), or with the bank that manages it.

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.

The SWIFT (Society for Worldwide Interbank Financial Telecommunication), also known as the BIC (Bank Identifier Code), is an alphanumeric code comprising 8 to 11 digits:

• Bank entity code (4 digits)
• Country code (2 digits)
• Branch location code (2 digits)
• Branch code (3 digits). This part of the code is optional. If it does not exist, it is assumed that the account is part of the central entity.

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.

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.

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:

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.