Equity Risk Premium: The excess return necessary to warrant investment in risk assets over government bonds.  Technically, the difference between the Implied Cost of Capital and the Risk-Free Rate.

Excess Risk Premium: The difference between the Total Return and the Prime Borrower Home Lending Rate.

Implied Cost of Capital: That discount rate which results in the present value of the dividends expected to result from ownership of a share being equal to the market value of that share.

Index: A measure of asset value across time.  Changes in Index Value reflect the Total Return of the underlying Reference Asset.

Index Mortgage: A mortgage that offers an option to Link.

Indexed Rate: The mortgage interest rate that results when a mortgage is Linked to an Index.

Index Value: The measure of an Index (denominated in index points) at a particular moment in time.

Link: The mathematical association of the mortgage interest rate to the performance of an Index.

Prime Borrower Home Lending Rate: The interest rate paid by “prime” borrowers for owner occupied mortgages when the loan to valuation ratio is less than 80%.  For the purposes of analysis, we assume the Prime Borrower Home Lending Rate is 1.25% lower than the Standard Variable Rate.

Reference Asset: A financial asset or investment mandate, the economic performance of which reflects in changes in Index Values.

Risk-Free Rate: The theoretical rate of return offered by an investment that has no risk of financial loss.  Since there is no such investment, government bond yields are used as a proxy.

Standard Variable Rate: The rate published from time to time by the Reserve Bank of Australia as part of the F5 – Indicator Lending Rate series, specifically the series numbered FILRHLBVS.

Total Return: The gross (before tax) return upon an investment over a given period (including capital gains, dividends and other distributions) assuming that all dividends and distributions are reinvested upon receipt at prevailing market prices.