We believe a glossary is key for any client trying to navigate through the range of complex terms and jargon in our industry.
Our most frequently defined terms are defined below but if there's something you think we should add, please contact us.
Real interest rate/real rate of return
Nominal interest rate or nominal rate of return adjusted for inflation.
When a debt (bond) is cancelled by repayment of the capital (principal) to the bond holders.
Redemption yield (or gross redemption yield)
The combined capital and interest return that an investor will earn on a bond to redemption.
The risk arising from uncertainty in the interest rate at which coupons and principal repayments will be reinvested.
Repurchase agreement (REPO)
An agreement to sell securities, usually bonds, to another party and to buy them, back at a specified date and price, usually after a few days.
Residential mortgage-backed securities (RMBS)
Secured on a pool of residential mortgages. These are typically amortising, meaning that the cash flows will include both interest and principal payments. The underlying mortgages can have varying characteristics: prime mortgages (e.g. the highest quality, most credit-worthy borrowers), buy-to-let mortgages and non-conforming mortgages (e.g. borrowers that don’t meet standard borrowing criteria).
Responsible investment typically refers to an approach that seeks to generate both financial value and encourage sustainability. It will typically take environmental, social and governance (ESG) factors into account.
Retail Prices Index (RPI)
The most common measure of inflation in the UK. A basket of representative retail goods in the market is priced monthly to monitor the rate of price inflation. See also Limited Price Indexation (LPI).
Usually a percentage which takes account of the income generated and the increase in value of a security over a given period, such as a year. Often confused with yield, which only takes account of the income.
The possibility that a particular outcome may not occur. In investment terms, risk is used to define all of the uncertainty relating to an asset, including upside as well as downside possibilities. (The popular definition of risk is the downside only). Risk in investment returns is commonly measured by the variance of the historical returns.
The incremental return that an investor expects over and above the risk-free rate of return in exchange for assuming an additional amount of risk.
Extent to which an investor is prepared to accept volatility risk in a portfolio to achieve higher returns.
Risk-free rate of return
The return on cash is typically taken as a measure of the risk-free return against which other riskier assets are measured.
The balance that all investors must strike between the desire for higher returns and low risk.
Futures contracts expire, so to maintain exposure to an index, contracts have to be sold and new ones bought as expiry dates approach. This process is known as rolling. The roll period is the period in which this ‘rolling’ takes place.