The interest rate, also known as a coupon, can be fixed or oriented around a reference interest rate. The amount depends on the financial situation (creditworthiness) of the issuer of the bond, the term to maturity and the general interest rate level. As a rule, bond issuers with a good credit rating pay lower interest than those with a bad credit rating. The longer the term of the bond, generally speaking, the higher the interest rate, since the money is tied up for a longer period of time.
At the end of the term, the creditor is returned the invested amount in full. In exceptional cases, the issuer may also default. In general, the following applies: The higher the credit rating of the issuer, the lower the risk of default. Consequently, bonds are usually less risky than equities and contribute to the diversification of a portfolio. Bonds are traded on the stock market. They can be bought and sold at any time. In each case, before investing in bonds it is important to determine the credit rating of the issuers, the interest situation and the term to maturity.
According to these investment regulations, the occupational pension institutions - the pension funds - are responsible for investing the money of their insured persons with an appropriate distribution of risk. They are therefore required to invest in different investment categories, regions and economic sectors in order to spread the risk appropriately. Different legal requirements apply to the individual asset classes with regard to how large their share may be, at most, in relation to the total assets. For example, a maximum of 50 percent of the total assets may be invested in equities, a maximum of 30 percent in real estate, and a maximum of 15 percent in alternative investments.
Someone has a bond of 100, which pays 2 per cent and has five years to go. So after five years his bond will bring him 110. If interest rates rise by 1 per cent, he could buy a bond of 100 with 3 percent interest. This would bring him 115 after five years. If you only look at the interest, it has a minus of five; in relation to the invested capital of 100, that makes 5 percent.
The abbreviation ESG relates to sustainability criteria that are taken into account as part of the investment process. As stated above, ESG stands for Environmental, Social and Governance. In contrast to traditional portfolios, ESG strategies take the aforementioned criteria into account in order to put together their portfolio in a correspondingly sustainable manner. There is no uniform standard for how ESG criteria are defined or weighted, but it is roughly as follows:
- Environment: Environmental factors are about the extent to which an organization pays attention to the protection of natural resources. These include energy consumption, energy use and measures to combat climate change throughout the supply chain.
- Social: Social factors include how an organization engages with society and how it treats people, for example in terms of health and safety at work.
- Governance: This is about responsible corporate governance based on transparency, proven industry standards or control processes.
In addition, the excess return shows whether undertaking the high-risk investment was worthwhile. As a rule, an excess return is accompanied by higher risk.
In order to calculate the excess return, the risk-free market interest rate is subtracted from the return achieved by an investment. For example, the excess return is 2 percent, if the risk-free achievable return is 4 percent and the high-risk investment has generated a return of 6 percent.
Income generated from price gains, dividends, interest or similar is distributed to the investors. In the case of a so-called accumulating fund, this is reinvested, which in turn increases the value of the fund units.
The amount of interest is determined, among other things, by the interest rate, the term, the debtor's ability to pay, the reason for the loan and the amount of money lent/borrowed. The interest rate is expressed as a percentage. It indicates the amount of interest to be paid. The amount of interest is determined within the scope of a contract and in consideration of the overall interest environment. The higher the interest rate, the greater the amount a person must pay back.
High interest makes loans more expensive, but also makes placing money in savings accounts more attractive. This situation is reversed when interest is low. In this situation, credit is cheap, but money in savings accounts yields lower returns.
Key interest rate
Borrowers are typically required to put up 20 percent of the value of the property they are buying from their own funds. Of this amount, at least 10 percent has to be covered by assets that are not pledged “second pillar” retirement plan assets. Roughly 67 percent of the property value can be financed via a first mortgage. This first mortgage does not have to be amortized, i.e. regularly paid down. Another 13 percent can be financed via a second mortgage. This second mortgage has to be repaid within a maximum of 15 years, or by the date of retirement if earlier. Your lender assesses your creditworthiness before granting a mortgage loan. A mortgage is deemed affordable as long as your total housing costs do not exceed one-third of your income. These costs are calculated as a long-term average, applying an imputed interest rate rather than an actual current rate. This method ensures that you will still be able to afford the financing in the event of rising interest rates.
Net asset value
Performance is often linked with return. In this context, the performance measures the profit or loss of an investment in relation to the money invested. This value is given as a percentage.
In addition, it can be compared with a reference value known as a benchmark. This can be used to estimate how well an investment has performed compared to another investment or the overall market.
As a rule, it is useful to observe the performance over a longer period of time. Performance is influenced by many factors: for example, the general market and interest rate trends, company performance or the individual investment strategy. In addition, short-term fluctuations may occur. Consequently, a long-term perspective helps to better assess the overall development.
For example, debt-free, childless, double-income couples, who live in their own home and have paid off their mortgage, generally have a higher risk capacity than low-income couples of the same age with children in compulsory education, a sizable mortgage and few assets.
Risk capacity is closely linked with risk tolerance. Together they form an investor's risk profile. Risk tolerance expresses how well a person can handle fluctuations in value. In other words, whether a person is at all prepared to accept losses and to what extent. This is dependent on the subjective estimation and evaluation of risk. A person's individual investment strategy can be determined on this basis.
A security is a document evidencing proof of ownership or a debenture. Equities confer a stake in the ownership of a company. Conversely, bonds represent an obligation. One party borrows money from another at fixed, agreed conditions and must pay this money back within a certain time.
Securities used to be printed on paper, which simplified the transfer of the security from one person to another. However, this also made it easier to steal or falsify securities. Today, securities are mostly available in electronic form.
Transferability and tradability are two integral characteristics of securities. They enable trade on the stock markets. Here, securities can be bought and sold at current market prices.
The higher the agreed interest rate for the pension fund, the higher the target return must be. If the return on investment exceeds the target return, the cover ratio increases. If it is lower than the target return, the cover ratio decreases.
The target return is lower than the actual targeted return on investment. The reason for this: Pension funds want to grow their assets. This gives them something to fall back on in years with poor investment performance without suffering a coverage deficiency.
Total Expense Ratio (TER)
The TER does not encompass transaction costs. These include, for example, brokerage and stock market fees as well as any tax payments. These costs are incurred when buying and selling fund units and are not deducted from the fund assets.
The TER is expressed as a percentage. It signifies the ratio between the costs of the fund and the Net Asset Value (NAV). The lower the TER, the lower the costs that the fund is burdened with. This allows the costs of various funds to be compared with one another. This is important, as high costs diminish the overall returns of a fund.
High volatility harbors both opportunities and risks. On the one hand, investors can profit from strong price gains. On the other hand, they can also suffer significant losses.
Various factors influence volatility: e.g. economic or political events, company or subsidiary news and even psychological aspects. High volatility can trigger strong emotions, such as fear or euphoria, and thus increase price fluctuations.
Withholding tax is a form of income tax. This entails tax being directly deducted from income and transferred to the cantonal tax authorities in Switzerland. Two groups of foreign employees are affected by this:
- Natural persons with a tax residence or domicile in the canton: for example, foreign employees
- Natural and legal persons without a tax residence or domicile in Switzerland: for example weekly/cross-border commuters, athletes/artists, administrative boards
Each month, the employer deducts the applicable tax contribution from the salary of these persons and transfers it to the tax authorities. In Switzerland, this amount comprises income tax owed to the Confederation, the cantons and the communes. The same principle applies to income from insurance, pension funds or investments. In return, those subject to withholding tax in Switzerland need not fill out a tax declaration. The amount of this withholding tax varies from canton to canton.
Yield to Maturity (YTM)
It also helps when deciding whether it is worth selling the security ahead of time or holding it until maturity. In addition, this allows various bonds and their expected returns, for example, to be compared.
From the perspective of the buyer, the YTM allows you to estimate how much can still be earned with a bond until it matures.