In the financial world, Agio, also known as a premium, refers to the amount paid over and above the nominal value of a security. It is a premium that is charged when securities, especially shares, are issued. The Agio reflects the difference between the nominal value and the price actually paid and can serve as an indicator of the market value development of the respective financial instrument. It is often used to cover the issuing costs or as additional income for the issuer.
For example, if a company issues new shares and sells them at a higher price than their original value, this additional amount is called an Agio. It indicates that the demand for these shares is high or that the company is considered particularly valuable.
The word “Agio” comes from Italian and is derived from “aggio”, which means “increase” or “surcharge”. It has its origins in the Latin “aggius”, which also means an increase or surcharge. The use of the term dates back to the Middle Ages, when trading and financial practices became increasingly complex and terms were developed for different financial transactions.
Over time, “Agio” became established in finance. The use of the term in modern finance became particularly widespread in the 17th and 18th centuries, when financial markets and stock exchanges gained in importance and more complex financial instruments such as shares and bonds were introduced.
An Agio is used in various areas of the financial world. Here are some specific examples and contexts in which an Agio plays a role:
These examples show how Agio is applied in different areas of the financial world to charge additional fees or mark-ups over and above the base value of the financial instrument.
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This table summarizes the most important information and calculations on the Agio in various financial instruments.
| Financial instrument | Description | Example | Calculation |
|---|---|---|---|
| Loans | The amount that the borrower pays in addition to the interest to obtain the loan. | A loan of 10,000 euros is paid out at 95%. The borrower receives 9,500 euros, but must repay 10,000 euros. | Agio = 10,000 euros - 9,500 euros = 500 euros, Agio = (500 / 10,000) x 100 = 5% |
| Bonds | Difference between issue price and nominal value of the bond. | A bond with a nominal value of EUR 1,000 is sold at EUR 1,050. | Agio = 1,050 euros - 1,000 euros = 50 euros, Agio % = (50 / 1,000) x 100 = 5% |
| Home loan and savings contracts | Fee for the allocation of the loan. | A home loan and savings contract for 50,000 euros is concluded with an Agio of 1%. | Agio = 50,000 euros x 0.01 = 500 euros |
| Shares | Difference between issue price and nominal value of the share. | A share with a nominal value of EUR 1 is sold at an issue price of EUR 10. | Agio = 10 euros - 1 euro = 9 euros, Agio % = (9 / 1) x 100 = 900% |
| Fund | Issue premium for the purchase of fund units. | A fund unit has a NAV of EUR 100 and a 5% Agio is charged. | Agio = 100 euros x 0.05 = 5 euros, purchase price = 100 euros + 5 euros = 105 euros |
| Foreign exchange trading | Difference between the official exchange rate and the rate actually applied, including premium. | Official exchange rate: 1 USD = 0.85 Cash Method of Accounting, applied rate: 1 USD = 0.87 EUR (Agio = 0.02 EUR). | Agio = Applied rate - Official rate = 0.87 EUR - 0.85 EUR = 0.02 EUR |
| Mortgage loan | Surcharge on the prime rate to increase the APR. | Base rate: 3%, APR: 3.5% (Agio of 0.5%). | Agio = Effective annual interest rate - base interest rate = 3.5% - 3% = 0.5% |
The amount of Agio is influenced by various factors and players, depending on the specific financial instrument or product. Here are some of the most important influences and responsible parties:
The following diagram provides a brief overview of what determines the amount of the Agio.
The level of the Agio is determined by a combination of market conditions, issuer decisions, regulatory requirements, company-specific factors, distribution costs and macroeconomic trends. Ultimately, it is a combination of these factors that determines the final premium over the nominal value of a financial instrument.
Important terms for Agio
| Term | Description |
|---|---|
| Agio | premium paid over and above the nominal value of a financial instrument. |
| Discount Points | Discount paid below the nominal value of a financial instrument; opposite of Agio. |
| Nominal value | The original or nominal value of a financial instrument. |
| Issue price | The price at which a financial instrument is actually sold or issued. |
| Effective Annual Percentage Rate (EAPR) | The actual interest rate that reflects the total cost of a loan, taking into account Agio and other fees. |
| Yield | The total return on a bond, often expressed as a percentage of the purchase price. |
| Nominal interest rate | The interest rate applied to the face value of a financial instrument, excluding Agio. |
| Coupon | The regular interest payment received by a bond investor. |
| Equity base | The equity of a company that is strengthened by the issue of shares at an Agio. |
| Issue premium | The Agio in investment funds that is paid when fund shares are purchased. |
| Financial supervisory authorities | Institutions that regulate the financial markets and monitor compliance with regulations. |
| Credit rating | The creditworthiness of a company or issuer, which influences the risk and cost of financing. |
| Net asset value (NAV) | The total value of a fund's assets, less liabilities, per unit. |
| Issuance | The process of issuing and selling new financial instruments, such as shares or bonds. |
| Macroeconomic factors | Economic trends and conditions that influence the demand for and price of financial instruments. |
This table summarizes the most important terms related to the Agio and its impact on various financial instruments and products.
To calculate the Agio, we need the nominal value (par value) and the actual issue price of a financial instrument (e.g. share, bond). The Agio is the difference between the issue price and the nominal value.
The following formulas help to calculate the Agio both in absolute figures and as a percentage of the nominal value.
The formula for calculating the Agio is:
If the Agio is to be expressed as a percentage of the nominal value, the formula is:
Assume that a share has a nominal value of EUR 50 and is sold at an issue price of EUR 60.
Calculation of the absolute Agio:
Agio = 60 euros - 50 euros = 10 euros
Calculation of the Agio as a percentage:
Agio % = (60 euros - 50 euros / 50 euros) × 100 = 20%
The Agio is therefore 10 euros or 20% of the nominal value.
This table provides an overview of the positive and negative aspects of Agio from the perspective of both lenders and borrowers.
| Advantages | Disadvantages |
|---|---|
| Compensation for risks: Lenders receive compensation for the risk taken, especially in the case of less creditworthy customers. | Higher costs for the borrower: Borrowers have to pay more, which increases the total cost of the loan. |
| Cost coverage: Agio helps lenders cover administrative and operational costs | Difficulty in obtaining credit: Potentially more difficult to obtain credit for borrowers with lower financial resources. |
| Profit margin: Ensures that the lending business is profitable for lenders | Reduced attractiveness: Can reduce the attractiveness of the loan compared to other forms of financing. |
| Market control: Agio can be used as an instrument to control the demand for credit. | Complexity and transparency: Can be difficult for borrowers to understand and reduce the transparency of loan costs. |
| Incentive to lend: Higher Agio can motivate lenders to lend even in uncertain times. | Interest rate risk: Increases the risk for borrowers if market interest rates rise, as the Agio can lead to higher overall costs. |
An Agio can affect interest rates in a number of ways, depending on the specific financial instrument or transaction. Here are some of the most important effects:
With loans, an Agio, also known as a Discount Points or discount, can increase the actual cost of the loan even though the nominal interest rate remains the same.
In the case of bonds, an Agio affects the return that an investor receives from the bond.
In the case of home loan and savings contracts, an Agio can increase the total cost of the loan as an additional fee.
When issuing shares and funds, the Agio plays less of a role in the interest, but more in the overall costs of the investment and raising capital.
An Agio affects the interest and overall cost of a financial instrument by increasing the APR on loans and lowering the yield on bonds. For building society contracts, it increases the total cost of the loan, while for shares and funds it mainly affects the entry costs and the raising of capital. In all cases, an Agio causes the actual cost or return to be different from the nominal interest rate or nominal return.
This table provides a clear overview of the main differences between Agio and Discount Points, their calculation, application and impact on the parties involved.
| Characteristic | Agio | Discount Points |
|---|---|---|
| Definition | Premium, the amount that exceeds the nominal value | Discount, the amount that is below the nominal value |
| Use | When issuing bonds or shares above par value | When borrowing or issuing bonds below par value |
| Financial effect | Increases the amount received by the issuer | Reduces the amount received by the borrower |
| Purpose | To raise additional funds | To increase the effective interest rate without changing the nominal interest rate |
| Example | A share with a nominal value of 100 euros is sold for 105 euros | A loan of 100,000 euros where only 98,000 euros are paid out |
| Calculation | Agio = selling price - nominal value | Discount Points = nominal value - amount paid out |
| Percentage calculation | Agio percentage = (Agio / Nominal value) × 100 | Discount Points percentage = (Discount Points / Nominal value) × 100 |
| Tax treatment | May be taxed as capital gains | May be treated as a deductible expense, depending on tax regulations |
| Risk for investors/borrowers | Higher risk as the purchase price is higher than the nominal value | Higher effective costs for the borrower |
| Impact on issuers/lenders | Additional funds when issuing bonds or shares | Receives part of the repayment upfront |
What is the Discount Points in contrast?
Find out more about basic economic terms. Deepen your knowledge with our dictionary!
To the article on Discount Points2% Agio means that you pay 2% more than the nominal value of a financial instrument.
The Agio may be as high as desired, as long as it is accepted by market conditions and contractual agreements.
The Agio is recognized as an additional inflow of capital and increases equity or liabilities, depending on the type of financial instrument.
The Agio is reported in the balance sheet under equity as a capital reserve.
Agio fees are additional costs that are charged over and above the nominal value of a financial instrument.
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