What is the premium? - The definition
that Agio, also as Aufgeld , is a financial premium that is incurred in various transactions. This is an amount that buyers pay in excess of the nominal value or issue price of a financial product. Agios are particularly common in the financial world, for example when issuing securities, fund shares, loans or foreign exchange. It is usually expressed as a percentage of the nominal value and varies depending on the type and provider of the financial product. When granting loans, the premium often acts as an additional fee that is imposed on the borrower and thus increases the repayment amount.
How does the premium work in practice?
Here is an example to illustrate: If a bank charges a bonus of 2.5% on a loan of CHF 100,000, the repayment amount is CHF 102,500 plus accruing interest over the term. In this example, this results in a premium of CHF 2,500.
Premium vs. discount
The opposite of Agios is that discount, Also known as a deposit, which serves as a discount to the face value. It is often used when borrowing or converting foreign exchange. In doing so, the borrower pays out less and receives a reduced payout amount — but the repayment is made at face value.
How does the discount work in practice?
If the bank calculates a discount of 5% when borrowing, this is deducted from the nominal value, in our example CHF 100,000, when paying out the loan. Only the reduced sum of CHF 95,000 is paid out. The difference serves as an advance interest payment to pay the credit costs. However, the full loan amount of CHF 100,000 must be repaid.
Where is Agio used?
The premium is used for a wide range of financial transactions:
- stocks: When new shares are issued, the premium is calculated as the difference between the nominal value and the issue price.
- fund: When buying fund shares, the premium is used as an expenditure premium to cover distribution costs. This is often 3-6% for equity funds and 2—4% for bond funds.
- borrowings: Bonds can be issued at a premium, a discount, or at face value. The premium increases the acquisition costs for investors, while at the same time influencing their return.
- foreign exchange: In foreign exchange trading, the premium is equal to the spread, i.e. the difference between the purchase price and the central price.
- credits: In lending, the premium increases the repayment amount for the borrower, but does not affect current interest rates.
How is the height of Agios determined?
The amount of the Agios is set by the providers and issuers of the financial product. A single-digit percentage is usually added to the face value, but the amount varies depending on the product.
Example: With a premium of 3% on a bond with a nominal value of 3,000 CHF, the purchase is made at an issue price of 3,090 CHF.
In Switzerland, providers of financial products who work with a premium or discount are required to report. The surcharges are an essential part of the contract and are set out in the contract terms and in terms and conditions overviews. The Swiss Financial Market Supervisory Authority (FINMA) monitors financial service providers and ensures transparency in their handling of premium and discount payments. https://www.finma.ch/de/~/media/finma/dokumente/dokumentencenter/myfinma/rundschreiben/finma-rs-2020-01-01012021_de.pdf?sc_lang=de&hash=EF884F2627342BEDEFE8457FD5C0106D
Effects of Agios on interest rates and effective interest rates
The premium increases the overall costs of a financial product. This has the following effect on interest costs:
- borrowings: A premium on bonds increases the purchase price. To compensate for this disadvantage for investors, issuers offer higher nominal interest rates so that the investment is still worthwhile.
- credits: A premium increases the borrower's repayment obligation, while 100% of the loan amount is paid out. For example, with a premium of 5% to 300,000 CHF, there is an additional repayment obligation of 15,000 CHF, which results in a total repayment of 315,000 CHF.
Comparison of the effective annual interest rate
Since the premium increases the total cost of a loan, it influences the effective annual interest rate, which takes into account all the costs of a loan. It is therefore advisable to include not only the nominal interest rate but also the effective annual interest rate in the decision when borrowing in order to compare the actual total costs of a financing offer.
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