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Glossary

Annual Effective Rate Asset Backed Security Bank Rate Bond Call Account Capital Certificate of Deposit Certified Financial Planner Commercial Paper Commission Compound Interest Corporate Bond Counterparty Counterparty Risk Coupon CPI Credit Rating Deposit Diversification Financial Advice Financial Plan Financial Ombudsman Financial Services Compensation Scheme Financial Services Authority Fixed Income Fixed Rate Floating Rate Note Gilt Gross Gross Interest Guaranteed Equity Bond Guaranteed Bond High Yield Bond High Yield Bond Fund Independent Financial Adviser ISA Inflation Inflation Risk Instant Access Account Institutional Investor Interest Interest Rate Interest Rate Risk Investment Bond Insurance Bond Investment Grade Investment Portfolio Investment Trust LIBOR Longevity Risk Low Risk Market Value Adjustment Market Risk MPC Money Laundering Money Market Money Market Fund Mortgage Backed Security Net Asset Value Net Net Interest Nominal Value No Notice Accounts Notice Period Open Ended Fund OEIC Ombudsman Pooled Investment Rate of Return Rating Agency Redemption Date Reference Rate Regular Bonus Repos RPI Real Return Risk Structured Product Structured Capital At Risk Product Tax Tax Year Terminal Bonus Term Deposit Time Deposit Units Unit Trust Unitised With Profits Variable Interest Rate Volatility With Profits Yield

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Annual Effective Rate (AER)

AER is the effective interest rate taking into account the frequency of interest payments and any bonuses offered. It is a standardised way to compare interest rates on a like for like basis and makes it easier for consumers to compare offers from different providers.

Asset Backed Securitiy

An asset-backed security is a bond issued by an institution that is backed (collateralised) by loans, leases or receivables against assets.

Bank Rate

The bank rate is the interest rate at which financial institutions can borrow money from the Bank of England. The rate is set by the Bank of England Monetary Policy Committee at its monthly meeting and is a rate for borrowing over a one week period.

For more information see the history of the bank rate on the Bank of England website. Click here for historic rates published by the Bank of England.

Bond

A bond is an type of investment offered by governments (gilts) and companies (corporate bonds) where investors lend them money for a specific time at an agreed rate of interest. The bond is repaid at the maturity date at its face value. Most bonds have a fixed term but some are issued as perpetuities. Rates of return depend on the duration of the loan, the level of risk involved and market interest rates.

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Call Account

A call account is a deposit with a financial institution that can be withdrawn ("called") at any time.

Capital

The amount invested.

Certificate of Deposit (CD)

This is a document produced by a bank in return for a deposit of money. The bank pays an agreed interest rate for a specific time. Certificates of deposit can be traded which means that it is possible to sell the CD before the maturity date to access capital early.

Certified Financial Planner

A top international financial planning qualification. A consumer knows that he or she is dealing with a practitioner who is academically and practically qualified to provide a comprehensive Financial Planning service at the highest level.

Commercial Paper

Commercial Paper is a short-term debt instrument issued by companies and financial institutions.

Commission

A payment to someone, for example a financial adviser, for arranging an investment.

Compound Interest

Interest that is calculated on the original amount invested as well as any interest already earned.

Corporate Bond

A corporate bond is a loan issued by a company. In return for an investment the company makes regular interest payments and then returns the investment at is face value on the maturity date. Interest may be fixed or variable (Floating Rate Note). The interest payment offered to investors will reflect the level of default risk of the company issuing the bond.

Counterparty

Any person or company that is a party to a financial transaction.

Counterparty Risk

The risk that the counterparty to an investment could default before the investment has been repaid in full.

Coupon

A bond's fixed rate of interest as a percentage of its nominal value.

CPI Consumer Price Index (CPI)

CPI is the consumer prices index. It is the measure adopted by the Government for its UK inflation target. The Bank of England's Monetary Policy Committee is required to achieve a target of 2 per cent. Prior to 10 December 2003, the CPI was published in the UK as the harmonised index of consumer prices (HICP).

Credit Rating

A formal opinion of the investment quality and credit risk of a company, bond or security.

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Deposit

A sum of money placed with a financial institution, usually a bank or building society. It is repaid with interest either on demand or subject to access restrictions agreed in advance.

Diversification

Diversification means spreading investments over a range of products and assets to reduce the risk of a loss.

Financial Advice

Discussion and a recommendation about the most suitable financial product(s) made by an adviser after reviewing an individual's financial position and needs. In the UK advisers are regulated by the Financial Services Authority (FSA).

Financial Plan

A written document which provides an analysis of an individual's current financial and future cash flow position and provides a blue print for how that person can achieve their lifetime goals, plans and objectives.

Financial Ombudsman Service (FOS)

The official independent expert in settling complaints between consumers and businesses providing financial services.

Financial Services Compensation Scheme (FSCS)

The FSCS is the compensation fund of last resort for customers of authorised financial services firms. If a firm becomes insolvent or ceases trading the FSCS may be able to pay compensation to its customers.

Financial Services Authority (FSA)

The UK financial services regulator.

Fixed Income or Fixed Interest

Fixed income (or fixed interest) securities pay a rate of interest which is fixed in advance and is paid at regular intervals. These include government bonds (gilts) and corporate bonds.

Fixed Rate

An interest rate that is fixed (i.e. it does not move up or down) for a specific time.

Floating Rate Note (FRN)

This is a corporate bond that pays a variable rate of interest linked to a reference rate. The rate of interest paid by FRN's will adjust according to the reference rate usually every three months or every six months. These instruments usually have a final maturity a number of years into the future, but because the rate of interest is reset at regular intervals they usually behave in a 'cash-like' manner.

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Gilt

Gilts are corporate bonds issued by the UK Government. They are considered to be very safe investments as the UK Government has never defaulted on payments. They are used as a benchmark against which interest rates of other bonds are set.

Gross

The amount before tax is deducted.

Gross Interest

Interest paid before tax is taken off is gross interest.

Guaranteed Equity Bond

A structured deposit which pays a rate of interest that depends on the performance of a stock-market index or asset. See also structured product.

Guaranteed Bond

A guaranteed bond is a life insurance policy that pays a fixed rate of return for a fixed term. Both the income and capital are guaranteed by the life company that issues the bond.

High Yield Bond

A high yield bond is a corporate bond which is rated by an independent rating agency as being below investment grade and therefore carries a higher risk of default. They pay a higher level of income than investment grade bonds to encourage investors to lend them money.

High Yield Bond Fund

A fund that invests in high yield bonds and offers a higher interest rate due to the higher risk associated with these bonds.

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Independent Financial Adviser (IFA)

An authorised and qualified professional who can advise on all financial services products available and tailor them to an individual's needs.

Individual Savings Account (ISA)

An ISA is an investment product that earns tax-free returns. An ISA can invest in cash or investments like stocks and shares or insurance. There is a maximum investment limit in each tax year.

Inflation

Inflation is the rate at which prices of goods are rising over time. Inflation means that more money is needed in the future to buy the same things as now.

Inflation Risk

This is the risk that the face value of an investment can buy less in the future than at the time the investment was made.

Instant Access Accounts

Savings accounts that allow money to be withdrawn at any time without penalty. This means that money can be withdrawn on the same day. See also no notice accounts.

Institutional Investor

A professional money manager whose job it is to purchase assets on behalf of institutions such as pension funds, life insurance companies, unit trusts and investment trusts.

Interest

Interest is the amount earned on savings. Interest can be variable (i.e. it can go up or down) or be fixed.

Interest rate

The rate of return earned on savings.

Interest Rate Risk

The risk of loss resulting from adverse movement of interest rates.

Investment Bond or Insurance Bond

A lump-sum life-assurance policy which covers several different product types such as guaranteed bonds, unit linked bonds and with-profits bonds.

Investment Grade

An investment with a credit rating of BB or better.

Investment Portfolio

The range of investments held by an individual investor. A portfolio will usually be diversified over a number of different asset classes.

Investment Trust

This is a company that invests in other investments. It has shares and is quoted on the stock exchange. It is a closed-ended fund as there are a fixed number of shares available.

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LIBOR

London Inter-Bank Offered Rate. The rate at which banks lend to each other.

Longevity Risk

The risk of outliving your capital.

Low Risk

A low risk investment has a high certainty of achieving target returns and a low likelihood of capital loss.

Market Level Adjustment, Market Value Adjustment and Market Value Reduction

In a with-profits policy the amount an insurer will reduce the value of a policy by if the policy is cashed in early.

Market Risk

The risk that an investment will fall in value because the market in which it is invested has fallen in value.

Monetary Policy Committee (MPC)

The MPC is a committee of the bank of England responsible for setting interest rates (the bank rate). The Bank's Monetary Policy Committee (MPC) is made up of nine members, five executives of the Bank and four external members appointed directly by the Chancellor.

Money Laundering

The process by which criminals disguise and hide the money made from their crimes.

Money Market

The UK Money Market comprises the following investment markets: deposits (call, term and CDs), gilts, asset backed securities, commercial paper, floating rate notes, mortgage backed securities and repos.

Money Market Fund

A fund that invests in money market instruments.

Mortgage-Backed Securities (MBS)

These are bonds that receive the cash flows from a pool of mortgage repayments. The mortgages in the pool for the security may be residential or commercial.

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Net Asset Value (NAV)

The value of a fund's underlying assets.

Net

The amount after tax is deducted.

Net Interest

Interest on savings after tax is deducted.

Nominal Value

The 'face value' of a bond, which is the cost of a bond when it is issued and the amount paid back at the maturity date.

No Notice Accounts

Savings accounts that allow money to be withdrawn without penalty and without giving notice of withdrawal. Payments will usually be made directly to a bank account and so may take three working days or more to be repaid. See also instant access accounts.

Notice Period

The time period a financial institution requires for an investor to withdraw money without penalty. 30, 60 or 90 days are common notice periods.

Open Ended Fund

A fund which continually issues or cancels units or shares as money is invested or withdrawn by investors. There is no fixed maturity date on which the underlying assets must be sold and their value returned to investors. Examples of open ended funds include OEICS and unit trusts.

Open Ended Investment Company (OEIC)

An OEIC is an open ended fund which issues shares to investors and pools their money with that of other investors across a range of assets. They are similar to unit trusts but the pricing of assets and the costs of transaction are separated from each other and so they are more transparent.

Ombudsman

A type of independent complaints scheme which aims to settle disputes about financial products or services impartially.

Pooled Investment

A way of putting different investment amounts from many people into a single investment fund. For small investors this is usually cheaper and more efficient than investing directly in underlying assets.

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Rate of Return

The change in the value of an investment taking into account both income and growth.

Rating Agency

A company whose business is to provide opinions on the credit worthiness of companies, bonds and securities.

Redemption Date

This is the date, set in advance, when a gilt or bond will be repaid by the issuing government or company.

Reference Rate

The interest rate used as a basis for calculating interest to be applied to a deposit account. This is calculated by reference to an external source, such as the Bank Rate or LIBOR.

Regular Bonus

A bonus paid to a with-profits policy each policy year which becomes guaranteed once it is paid. Also known as a 'reversionary' or 'annual' bonus.

Repurchase Agreements (Repos)

This is a short-term form of borrowing whereby a dealer in government securities borrows money, often on an overnight basis, by selling a government security to an investor. They will then buy back the security on an agreed date, such as the next day.

Retail Prices Index (RPI)

RPI is the retail prices index and is one of the official measures of inflation. RPI is used for indexation of pensions, state benefits and index-linked gilts.

Real Return

A real return is the return on an investment over and above the rate of inflation. It is the real return which generates the increase in wealth of an investor over the long term.

Risk

In the financial context risk is the possibility of financial loss. This includes market risk, inflation risk, interest rate risk and longevity risk.

Structured Product

A product where the return is linked to the performance of one or more stock market indices.

Structured Capital At Risk Product (Scarp)

A product that offers fixed income but the return of capital at the end of the term is reduced if the stock market is below its starting level at the end of the investment term.

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Tax

A charge paid to the government. There are different types of tax but income tax, capital gains tax and inheritance tax are the ones most individuals will need to consider.

Tax Year

6th April one year until 5th April the following year.

Terminal (or final) Bonus

The bonus calculated and added at the end of a with-profits policy.

Term or Time Deposits

A term deposit is a deposit with a financial institution for fixed term. The deposit may not be terminated early unless the financial instituion agrees to break the deposit and a penalty will be charged. The time of deposit spans from overnight to a number of years.

Units

A portion of an investment fund which is notionally purchased by an investor.

Unit Trust

An open-ended, pooled investment fund. It gets bigger as more people invest and smaller when they take money out.

Unitised With-Profits Fund

A with-profits fund that is sub-divided into units.

Variable Interest Rate

Interest rates offered by banks and financial institutions on deposits which can be changed according to circumstances.

Volatility

Volatility refers to the fluctuations in the price of an investment. An investment has high volatility if it experiences large movements in its price.

With-Profits Fund

A type of life assurance investment where premiums for a with-profits policy are pooled with other with-profits policyholders. Each year a regular bonus and terminal bonus is declared which reflects the return on the fund.

With-Profits Policy

A policy such as a pension, endowment, bond or whole-of-life policy which is invested in a with-profits fund.

Yield

The annual income paid on an investment (dividends or interest) expressed as a percentage of the value of the investment.

Acknowledgement - Some of the definitions listed were sourced from the following websites: Association of British Insurers, Institute of Financial Planning, Money Made Clear

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