Zeros

Zeros can be particularly attractive for investors who do not generally utilise their annual CGT allowances (£10,100 for 2009/10 tax year), since it will often be possible to obtain the return 'tax free'.

AITC

The Association of Investment Trust Companies.

Banking Covenant

Loan agreement between the investment trust and bank stipulating the terms of the loan. It will generally impose some conditions on the maximum permitted gearing.

Bid Price

The price at which you can sell shares.

Bid/Offer Spread

The difference between the bid and the offer price.

Capital Cover

A measure of the capability of the underlying assets to meet the redemption price of the zeros at any particular time (net assets of the trust available to repay the zeros divided by the cost of redeeming the zeros). Capital cover of less than 1 means that the zeros are uncovered.

Capital Shares

In a split-capital trust, the shares which receive little or no income throughout the life of the company but which are entitled to the benefit of all, or most, of the capitals appreciation on the trust's portfolio once any other shares have been redeemed.

Cover

See Capital Cover.

Dual Capital Trust

Another term for a split-capital trust. Also can be referred to as a Dual Purpose Trust.

Geared Ordinary Shares

Class of share in a split-cap investment trust that combines the merits of both Income and Capital Shares.

Gearing

Level of borrowing in the underlying trust relative to total assets.

Hurdle Rate

The hurdle rate is the rate of growth required by the portfolio in order for the zeros to be redeemed in full. Must take into account any class of capital which holds a prior call on the assets such as a bank loan and future management costs.

Income Shares

The class of shares which is entitled to receive all or most of the trust's income earned on the portfolio throughout the life of the company plus a predetermined capital value on wind up.

Leverage

US term for gearing becoming more popular in the UK.

Maturity Date

See Redemption Date

Maximum Gearing

Amount of allowable debt in a trust as stipulated by the Articles of Association.

Offer Price

The price per share paid when purchasing an investment.

Prior Charges

Any liabilities due to be paid before the zero dividend preference shares have any call on the trust's assets.

Redemption Date

The predetermined date upon which the zero will return the redemption price. Also called the maturity date.

Redemption Price

The predetermined price payable by the trust to share holders on the redemption date.

Redemption Yield

The compound annual return achieved by holding a zero to maturity.

Relevant Discounted Security

A Fixed interest security not based upon shares, with a pull to redemption price of more than 0.5% per annum or more than 15% over a 30+ term, in which case all returns are taxed to income tax. However, Zeros are not treated as a relevant discounted security as they are equity based and therefore the return on a zero is taxed as capital gain.

Roll-over Trust

An alternative to encashing a zero at maturity that is sometimes offered by the managers. Can be used to avoid crystallising a gain on the redemption date thereby avoiding potential CGT.

Split Capital Investment Trust

An investment trust with a limited or determinable life, whose equity capital is divided into various classes of share.

Spread over Gilt

Additional yield on a zero when compared to a similarly dated Gilt, this can be an indication of the riskiness of a Zero.

Stamp Duty

A tax of 0.5% on the purchase of shares.

Stepped Preference Shares

Similar to zeros in that they pay a predetermined redemption price at the end of a fixed term. However, this share class is also entitled to dividends rising in steps at a set annual rate during the life of the trust. Rank behind zeros in a trust winding up.

Winding Up

The process of terminating an investment trust by realising its assets, paying off creditors and distributing the remaining assets among shareholders, according to the correct order of priority.

Zero Dividend Preference Shares (Zeros)

A share with no right to receive a dividend. It is entitled instead to a fixed sum on repayment and usually has preference over other share classes.

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