Glossary

The time remaining until the end of a term of investment is reached, i.e. until the product matures or expires.

A flat fee, which at MBC covers the following costs: custody account administration, including account management, Maestro card, account bookings, postage within Switzerland and abroad, account statements, payments in Switzerland (30 transactions p.a.) and a half-yearly statement of assets; asset management costs; brokerage fees on stock market transactions (excluding third-party fees); booking fees for fiduciary investments; retained mail; and income statements for tax purposes.

Investments outside the framework of traditional asset classes such as stocks and bonds. The limited correlation of alternative investments with stock and bond markets makes them well suited for portfolio diversification. Examples of alternative investments include commodities, real estate, hedge funds and private equity.

American-style options may be exercised by the option holder at any time before the option expires.

The simultaneous purchase and sale of an asset in different markets in order to profit from a difference in the price.

Price at which a security can be bought on the stock exchange or over the counter. The ask price is always higher than the bid price. This difference is referred to as the "bid-ask spread".

The capital market distinguishes between different "classes" of investments or assets. Among the main classes are stocks, bonds, money market investments and alternative investments.

A reference value, such as a stock index, which serves as a standard of comparison. An index that serves as a benchmark is also called a reference index or reference value.

The "best-in-class approach" is a selection strategy used in fund research whereby the fund is selected that best fulfils one or more criteria (e.g. risk-adjusted return over 3 years) within its class (e.g. equity fund for European stocks).

Price at which a security can be sold on the stock exchange or over the counter. The bid price is always lower than the ask price. This difference is referred to as the "bid-ask spread".

"Bonds" or "debentures" are notes issued in security form for the purpose of borrowing capital. The "issuer" undertakes to repay the capital by a given date fixed in advance and pays the bond holder interest, usually on an annual basis. Both corporations and governments may issue bonds. In addition to bonds offering a fixed rate of interest, a wide variety of other interest rate models also exist (e.g. zero-coupon bonds, step-up bonds, variable-interest bonds).

The book value per share is the amount of equity reported in a company's balance sheet divided by the number of shares outstanding. It is a measure of the minimum value of a company's equity and helps investors determine how attractively valued a stock is. The book value per share is frequently below the share price.

A "call", or "call option", is a derivative financial instrument. The buyer of a call option purchases the right to acquire the underlying asset within a given period of time ("American call") or on a particular date ("European call") at a pre-defined price ("strike price"). The price the buyer pays for this right is referred to as the "option premium". A call option gives the buyer the right to purchase, but does not obligate him to do so. The seller of the call option, on the other hand, is obligated to sell the underlying asset at the pre-defined price if the call option is exercised, and in return the seller receives the option premium.

The ratio of capital and reserves to total assets. What constitutes a "reasonable" capital ratio differs according to sector. A trading company will typically have a lower capital ratio than a service company.

Investment certificates are derivative financial instruments that allow the holder to participate in the performance of the asset underlying the certificate. The underlying may be a stock, an index, a basket of shares or a given volume of commodities, for example. The term of the investment certificate may be limited or unlimited.

Basic goods such as metals, fuels and agricultural products.

A bond which under certain circumstances and conditions may be converted into shares or participation certificates of the company in question.

A statistical measure that expresses the linear relationship between two variables (e.g. the relationship between the performance of a given stock and the performance of a stock index). A positive correlation means that when one variable (on average) increases the other variable (on average) also increases. A negative correlation means that when one variable increases the other variable decreases. By definition, the correlation ranges from +1 (perfect positive) to –1 (perfect negative). A correlation of 0 means that there is no relationship between the two variables.

A structured product with minimal counterparty risk because the invested capital is protected by means of a collateral pledge.

The "coupon" refers to the periodic (typically annual or semi-annual) interest payment owed by the issuer on a bond. Coupons may be fixed or variable.

The likelihood that a borrower will fulfil his obligations (repayment).

The risk that one contractual party does not fulfil its obligations such that the other contractual party suffers a loss as a result.

The sustained decline of price levels in an economy.

A ratio used to qualitatively assess options and other derivatives. It measures the change in the price of the option when the price of the underlying asset changes by 1 currency unit. By definition, delta values range between 0 and 1 for call options and between −1 and 0 for put options.

The word "derivative" comes from the verb "to derive" and is the general name for financial products that are linked to one or more underlying assets on which their value depends. Examples of derivatives include futures, options and swaps.

An asset management mandate in which the bank (in its role as asset manager) takes the investment decisions in line with the mandate's risk profile, which is determined by the client's individual situation and preferences (capacity and willingness to bear risk). Within the bank the mandate is administered by the portfolio management department.

Reducing the risk associated with a given portfolio by distributing the investments between different positions, asset classes and/or currencies. A diversification effect can only be achieved if subsequent investments are not perfectly correlated with the existing investments (see also "correlation").

The portion of a company's net profit that is distributed to shareholders (see also "payout ratio").

A financial ratio showing how much a company pays out in dividends each year relative to its share price. It is expressed as a percentage.

The maximum "drawdown" is a commonly used key figure representing the maximum cumulative loss in a measurement period (usually expressed in %).

The principle of exercising "due care". In particular, it refers to the standards of risk assessment usually applied in connection with the acquisition of a company and also the practice of systematically examining and vetting investment fund providers.

In finance, "duration" is a measure of a bond’s interest rate risk. The higher the duration, the higher the risk of experiencing losses on bonds when interest rates climb, and the greater the potential for making gains when interest rates decline). Duration corresponds with the weighted average of the points in time when the investor receives payments on a fixed-interest-rate security.

Earnings before interest and taxes is a key financial figure and a gauge of a company's performance and economic efficiency. It is also referred to as "operating profit".

Emerging markets are nations undergoing a process of rapid growth and industrialisation; previously referred to as "developing countries" (in contrast to "industrialised countries").

Investment funds that are traded on the securities exchange. Typically, ETFs aim to replicate the performance of a given index such as the SMI or DAX. ETFs are often referred to as "passive funds" because they passively replicate a given index, i.e. the fund manager does not bet against the index (by overweighting share X and underweighting share Y). The management fees for ETFs are therefore usually lower than the fees for actively managed funds.

European-style options can only be exercised on the day the option expires.

Asserting of the rights associated with an option. The option holder either purchases the underlying asset (call option) or sells the underlying asset (put option) (see also "exercise of subscription rights").

The value of a security which seems appropriate ("fair") based on a valuation (which relies on certain assumptions). The fair value of an option is the value an option would have if exercised and if the value of the underlying were not to change. This is calculated as the difference between the current price of the underlying and the exercise price (in the case of a call) or the difference between the exercise price and the current price of the underlying (in the case of a put). See also "time value".

An institution or person who acts as a mediator between capital supply and demand on the money and credit markets.

The official independent body that supervises and controls all areas of the financial sector, including banks, insurance companies, stock exchanges and collective investment schemes.

Economic policy measures applied by the state that affect taxes and government spending for the purpose of helping to balance fluctuations in the economy and thereby maintain stable economic growth. Another goal of fiscal policy is to increase levels of employment.

Foreign exchange refers to instruments of payment in a foreign currency.

A non-standardised future trade: contract fulfilment and payment are in the future, while the purchase price and conditions are stipulated immediately. Forwards are concluded directly between the two contracting parties ex-market ("over-the-counter", OTC). A forward contract may concern shares, goods, currencies, interest rates or other underlying instruments.

A transaction for which the price and conditions are agreed in the present, but settled at a date in the future.

The price or rate agreed for a forward transaction.

A standardised forward transaction which is traded on a special futures exchange and obligates the contracting party to buy or sell a pre-defined volume of a certain underlying in a given investment class for an agreed price at a particular point in time. The counterparty is the futures exchange, which monitors the margin (pledged securities) of the contracting party and liquidates the position if the margin becomes insufficient. Since the margin is the only amount actually invested, a future is a so-called "leveraged product". This means that the investor’s exposure is several to many times greater than the actual investment, which can result in enormous losses. Sometimes the loss even exceeds the capital initially invested.

Gross domestic product (GDP) is an economic measure indicating the monetary value of all the goods and services produced by a country over the period of a year. GDP thus gauges an economy's value creation. Economic growth is defined as the annual change in (real) GDP.

A certificate that guarantees repayment of the entire invested capital, but not until the end of the maturity period. In some specific cases the guaranteed amount may also be less than the invested capital. Normally, 80−100% of the issue price of the guarantee certificate is repaid. Losses may be incurred, however, if the investment is sold prior to the maturity date. Normally the investor's potential loss is limited to a maximum of 20% of the issue price. Issuer risk is still present under all circumstances. This means that if the issuer should default, the certificate does not get segregated and falls into the bankrupt's estate. The return is lower than that for the same certificate without capital protection.

"Hedge funds" are investment funds which generally apply unconventional investment techniques and strategies and employ long, short and derivative positions to achieve a leverage effect. Due to the low correlation with traditional investments, hedge funds often serve as a means of diversification. The risks associated with hedge funds can be considerable, due to assets being invested in restrictive jurisdictions, limited liquidity (e.g. only quarterly trading), frequent penalties for redemptions within the first year or a temporary blocking of redemptions ("gate"). Investors should thoroughly inform themselves about these risks.

A method of reducing potential losses from anticipated adverse price changes so as to protect an investment or an entire portfolio.

A bond with a credit rating lower than investment grade (AAA to BBB-), which typically means the bond pays a higher yield than investment grade bonds do because the risk of default is higher.

A rise in price levels within an economy, which reduces the purchasing power of the country's currency. The opposite is "deflation", which means there is a decline in price levels.

Dividing investments up between different asset classes and currencies.

Investment funds are collective financial investments which are legally regulated (see Swiss Collective Investment Schemes Act, "CISA"). Investment funds may have an open form (the majority of funds) or closed-end form and be actively or passively managed. Active funds manage portfolios that diverge from their benchmark, while passive funds (see ETF) concentrate on replicating the benchmark and are therefore usually cheaper than actively managed funds. Investment funds may comprise any asset class or hybrid forms.

Fixed-income securities with a credit rating of AAA to BBB- (S&P) or Aaa to Baa3 (Moody's).

An internationally recognised code that uniquely identifies a security.

Institutions which issue securities or similar instruments on the money markets or capital markets in order to raise capital, or which do so with the help of banks.

The interest rate set by a country's central bank that applies to commercial banks when they refinance themselves. Key interest rates are normally the main instrument of monetary policy.

Leverage is a key financial figure for assessing derivatives. Leverage refers to the relationship between the investment exposure and the capital employed. A leverage factor of 10:1 means that a loss of 10% on this leveraged position represents a total loss of the invested capital, while a gain of 10% doubles the invested capital.

Cash and money market investments with a term of less than 12 months.

A buy position which speculates on an increase in the value of an underlying financial instrument. The holder of a long position benefits if the value of the underlying financial instrument increases. The contrasting sell position is referred to as a "short position".

Macroeconomics is a discipline that analyses interactions and overall relationships in the economy. It focuses primarily on changes in unemployment rates, growth rates, national income, gross domestic product, inflation and prices.

The amount of money to be deposited as security for derivatives transactions such as futures and options.

Monetary policy is the sum of economic policy measures employed by a central bank to achieve its goals. When money supply is reduced, monetary policy is described as "restrictive"; when money supply is increased, monetary policy is described as "expansionary". Key interest rates are the instrument typically used to implement monetary policy.

Leading global stock market index tracking over 1,600 stocks from industrialised countries. MSCI stands for Morgan Stanley Capital Index.

The net asset value of one investment fund unit is the net fund assets of the investment company divided by the number of units issued.

Nominal interest is paid by a debtor to a creditor, usually on an annual basis, as consideration for the capital borrowed for a given period of time.

An investment mandate where the investment decisions are taken by the client after consulting with the client advisor and the bank's investment specialists.

Options are a derivative financial instrument. They refer to underlying assets such as stocks, foreign currencies, bonds, commodities or indexes. The purchaser of an option acquires the right, but not the obligation, to buy (call option) or sell (put option) the underlying asset within a given period of time at a pre-defined price ("strike price").

Over-the-counter trading refers to securities trading in some context other than on a formal, centralized exchange, i.e. financial transactions between financial market participants which are not conducted over a stock exchange.

Gross dividends distributed in relation to net profit.

Exercise of a right (in the case of an option) or an obligation (futures contract) to acquire the actual underlying asset (call options, long positions in futures) or deliver the actual underlying asset (put options, short positions in futures). Investors not wishing to take actual possession of the underlying commodity may instead choose to transact an options or futures contract by means of "cash settlement".

The sum of all financial investments contained within a given custody account.

The price-earnings ratio is a measure of equity valuation. It is the current share price divided by the amount of reported or estimated profit per share. The lower the P/E ratio is, the cheaper the share.

The price-to-book ratio compares the current market value of a company with the book value of a company's equity. The lower the P/B, the cheaper the stock is.

A special form of investment capital; the investment entered into by the provider of the capital cannot be publicly traded on a regulated market (stock exchange). Private equity investments may be made by individual investors or institutional investors. A private equity investment in a new company (start-up) typically entails above-average risk and is therefore also referred to as "venture capital"; financing provided for investments in expansion is referred to as "growth capital"; and a takeover financed with borrowed capital is referred to a "leveraged buyout". Private equity investments are typically very long-term investments (usually 10 to 12 years) and are associated with special risks because they restrict investor liquidity.

A concept in economic theory which says that different inflation rates in two countries will manifest in the exchange rates of the countries' currencies. Accordingly, a country with a higher inflation rate would thus have to have a weaker currency over time. Empirically this phenomenon can only be observed over a long time horizon (5 years).

A "put", or "put option", is a derivative financial instrument. A put option entitles the option holder to sell the underlying asset within a given period of time at a pre-defined price. The price the option holder pays for this right is called the "option premium". A put option gives the owner the right, but not the obligation, to sell a specified amount of an underlying security at pre-agreed conditions. The seller of the put option, on the other hand, is obligated to acquire the underlying asset at the pre-defined price if the put option is exercised, and in return the seller receives the option premium.

An investment or leveraged product that is hedged against exchange rate risks. The hedging generates additional costs, however.

A "rating" is the assessment of a debtor's creditworthiness by a specialised rating agency (Moody's, S&P, Fitch etc.) in connection with debt instruments, i.e. it is an estimation of a debtor's solvency and thus the related risk of debt default. "Rating" may also refer to buy and sell recommendations for stocks ("buy rating" und "sell rating").

Property or building which may serve as investment, i.e. by generating rental income or potential capital gains through increases in value.

Real interest is the nominal interest rate less the inflation rate, or, in other words, the interest earned on assets adjusted for inflation.

The income in percentage terms earned from an investment, typically on an annual basis. It is calculated as the annual income generated on the capital divided by the amount of capital employed. The investment income may include coupon payments, dividends, interest and currency and capital gains. Cf. "yield".

An indicator of how efficient a company's management is at using the company's assets to generate earnings. Return on assets is calculated as the ratio of interest on debt plus net profit divided by total capital.

A key financial figure calculated as the ratio of net profit to equity. It can be increased through the use of more borrowed capital − assuming the borrowing costs are lower than the return on the borrowed capital [net profit + interest on borrowed capital / total capital].

A structured financial product for which the repayment of the invested capital depends on the performance of the share. At the end of the product's term, the investor either receives the full nominal amount invested or a pre-defined number of the shares in question. In addition, during the term of the product the investor receives one or more coupon payments, the amount of which depends on various parameters (dividend yield, implicit volatility of underlying options).

In modern financial theory, risk is embodied by the magnitude of price fluctuations, as expressed by the standard deviation (a statistical measure of variation) of financial returns; also referred to as "volatility".

The compensation demanded by investors for the risk they incur in connection with given investments. This compensation takes the form of higher returns as compared to risk-free investments.

Securitisation refers to the process of turning financial assets into securities, i.e. financial instruments that can be readily bought and sold in financial markets. The securitised assets may be, for example, mortgages or other future cash flows or property rights.

A security that represents a portion of the nominal capital of a public company or corporation. A share in a company imparts property rights (rights to dividends, liquidation proceeds and allocation of shares or subscription rights in the event of a capital increase) and participation rights (voting and election rights at the annual general meeting of shareholders).

A measure of the risk-adjusted performance of a portfolio which is expressed as the relationship between the returns generated in excess of the risk-free interest rate and the portfolio's level of risk (as measured by the volatility).

A sell position which benefits from a loss in value of the financial instrument. A short position, such as an uncovered sale ("naked short"), speculates that the price of the financial instrument in question will drop, so it can be acquired at a lower price than the investor had previously sold it for, thereby generating a profit.

Bonds issued by a country's government. The bond holder receives interest, usually on an annual basis.

The difference between the ask price and the bid price of a security or currency. In other words, the difference between the highest price that a buyer is willing to pay for an asset and the lowest price for which a seller is willing to sell it.

A mathematical construct that gauges the value of a stock market. There are many different types of stock indexes that represent particular markets or sub-markets. The most common types are price indexes, total return (or performance) indexes and capitalisation indexes.

Long-term strategic allocation of investment assets across different investment classes and markets consistent with the investor profile determined in advance (based on his investment goals and horizon as well as his risk class).

The strike price (or exercise price) of an option is the predefined price at which the owner of the option can buy (call option) or sell (put option) the underlying asset either on a given date or before the option expires.

A financial instrument made up of one or more underlyings and at least one derivative component. As these products are complex, investors should be sure they sufficiently understand the way they function.

The Swiss reference number used to identify individual securities of all kinds. It is composed of six to eight digits.

Exploiting short-term opportunities within a selected asset class through overweighting, for example. The resulting deviation from the portfolio's long-term strategic allocation (SAA) serves to potentially enhance the total performance of the portfolio.

A measure of the total costs associated with an investment fund, i.e. the costs incurred for managing and operating an investment fund in addition to the issuing premium.

The proportion of core equity capital banks must hold to meet capital adequacy standards as defined in the Basel I, II and III accords.

The part of the price of an option (premium) that does not correspond with the intrinsic value. The time value is attributable to the amount of time remaining until the expiration of the option contract.

The object whose value determines the price of a financial derivative and is the basis of the transaction contract. Examples include individual securities, indexes, currencies and commodities.

A measure of the variability in the returns on an investment over a given period of time. Volatility is typically calculated as the annualised standard deviation of returns.

An option that is traded over the counter (OTC).

The annual return anticipated on a fixed-income security if it is held until maturity. It is calculated based on the purchase price, coupon payments and the repayment of capital at the end of the term.