Glossary of terminology
Nominal value
The basis for calculating an addition of interest is not the purchase price of bonds but their nominal value. Nominal value of investments is guaranteed. Thus, if an investor obtains index-linked bonds for the price higher than their nominal value, the investment share that exceeds the nominal value will not be guaranteed. Usually index-linked bonds are distributed for the nominal value of EUR 1000.
Example: you have obtained index-linked bonds, and the growth index at the end of the period is 30%.
- If the bonds were obtained for the nominal value, the investment will produce a profit of 1000 x 30% = 300 euros or 30% of the invested assets. If the bonds were obtained for a lower or higher price, all the same the profitability will be calculated on the basis of the nominal value of 1 bond or 1000 euros.
- If the bonds were obtained for 1050 euros (the purchase price is 50 euro higher than the nominal value), the investments will produce 300 euros though the return and thus the profit will be 50 euros lower, i.e. 250/1050 = 23.8%.
- If the bonds were obtained for 950 euros (the purchase price is 50 euro lower than the nominal value), the profit on the investments will be higher as, in addition to the increase, you are also entitled to 50 euro that fall short of the nominal value, i.e. 350/950 = 36.84%.
Capital guarantee
At the end of the period an investor is paid back 100% of the nominal value.
Participation Ratio
The percentage share of the growth index that is paid to the investor. Below, there are some scenarios assuming that during the validity period of the bonds the investor has obtained one bond with the nominal value of EUR 1000 and the related index has grown 30% up.
- Participation ratio is 100%. On the day of bond redemption the investor will receive not only the nominal value of the investment sum but also the 30% increase that is calculated on the basis of the nominal value, i.e. 1000 + (1000 x 30%) = 1300 euros.
- Participation ratio is 70%. The investor will receive the invested sum as well as the difference that is formed by the invested sum and the nominal value of the bond, i.e. 1000 + (1000 x 30% x 70%) = 1210 euros.
- Participation ratio is 130%. The investor will receive 1000 + (1000 x 30% x 130%) = 1390 euros. Usually the participation ratio of over 100% is offered only with the risk premium (in addition to the nominal value of bonds the investor shall pay approximately 10% of the investment sum).
Index
Usually index-linked bonds are related to the indexes well known in the world (Dow Jones, S&P, NASDAQ). The index and the other specifications of bonds are determined in the Final terms and conditions of bonds.
Closing Index Value
Index value that is used for calculating the index increase. Usually the arithmetical average of the index values during a certain period of time is applied, which protects the investor from the threat to lose profit in case the index value at the moment of bond redemption is negative. The below-stated example demonstrates this principle more clearly:
The bonds with the nominal value of 1000 euro with the 100% participation ratio that are to be paid to off on the 30th of April 2010. The opening index fixing day is the 5th of April 2008, and the index is fixed on the 20th day of the first month of each quarter during the last year.
On the 5th of January 2008 the index value is 13 100 units, but the final index values on the fixing days are as follows correspondingly:
- on the 5th of July 2009: 13 100 units
- on the 5th of October 2009: 15 800 units
- on the 5th of January 2010: 17 900 units
- on the 5th of April 2010: 18 700 units
The final index value will be the same as the average of the fixed values on the index fixing day, i.e. the final value = (13 100+15 800+17 900+18 700)/4 = 16 375 or the 25% increase.Thus the index increase and the investor's profit is 25% or 25o euros.
If the final value is lower than the opening value, on the redemption day the investor is paid the nominal value of the bonds.
