Finance Glossary

Finance Glossary

Acceleration Clause – A stipulation in a loan contract stating that the entire balance becomes due immediately if other contract conditions are not met.

Accrued Interest – Interest that has been earned but not received or recorded.

Amortization – Liquidation of a debt by making periodic payments over a set period, at the end of which the balance is zero.

Annuity – A series of equal payments made at regular intervals, with interest compounded at a specified rate.

Appreciation – An increase in the value or price.

Asset – Anything an individual or business owns that has commercial or exchange value.

Auto Debit – The deduction from a checking or savings account of funds that are automatically transferred to a creditor each month. Some lenders offer interest rate discounts if loan payments are set up on auto debit at the beginning of the loan.

Balance – The amount owed on a loan or credit card or the amount in a savings or investment account.

Balance Sheet – A financial statement showing a “snapshot” of the assets, liabilities and net worth of an individual or organization on a given date.

Bankruptcy – A legal proceeding declaring that an individual is unable to pay debts. Chapters 7 and 13 of the federal bankruptcy code govern personal bankruptcy.

Beneficiary – The person designated to receive the proceeds of a life insurance policy.

Budget – An itemized summary of probable income and expenses for a given period.

Capital – Cash or other resources accumulated and available for use in producing wealth.

Cash Flow – Money coming to an individual or business less money being paid out during a given period.

Certificate of Deposit (CD) – A type of savings account that earns a fixed interest rate over a specified period of time.

Collateral – Assets pledged to secure a loan.

Common Stock – A kind of ownership in a corporation that entitles the investor to share any profits remaining after all other obligations have been met.

Compound Interest – Interest computed on the sum of the original principal and accrued interest.

Credit – The granting of money or something else of value in exchange for a promise of future repayment.

Credit Card – A plastic card from a financial services company that allows cardholders to buy goods and services on credit.

Credit Report – A loan and bill payment history, kept by a credit reporting company and used by financial institutions and other potential creditors to determine the likelihood a future debt will be repaid.

Credit Reporting Company – An organization that compiles credit information on individuals and businesses and makes it available for a fee.

Credit Score – A number generated by a statistical model that objectively predicts the likelihood that a debt will be repaid on time.

Credit Union – A cooperative organization that provides financial services to its members.

Creditor – A person, financial institution or other business that lends money.

Debit – Charges to an account.

Debit Card – A plastic card similar to a credit card that allows money to be withdrawn or the cost of purchases paid directly from the holder’s bank account.

Debt – Money owed; also known as a liability.

Debt Service – Periodic payment of the principal and interest on a loan.

Deductible – The amount of loss paid by an insurance policyholder. The deductible may be expressed as a specified dollar amount or a percent of the claim amount.

Delinquency – The failure to make timely payments under a loan or other credit agreement.

Direct Deposit – The electronic transfer of a payment from a company to an individual’s checking or savings account. Many employers offer direct deposit of paychecks.

Diversification – The distribution of investments among several companies to lessen the risk of loss.

Dividend – A share of profits paid to a stockholder.

Equity Ownership – interest in an asset after liabilities are deducted.

Face Value – The principal amount of a bond, which will be paid off at maturity.

Fair Market Value – The price a willing buyer will pay and a willing seller will accept for real or personal property.

Federal Deposit Insurance Corp. (FDIC) – A federally chartered corporation that insures bank deposits up to $100,000.

Finance Company – A company that makes loans to individuals.

Financing Fee – The fee a lender charges to originate a loan. The fee is based on a percentage of the loan amount; one point is equivalent to 1 percent.

Flexible Spending Account – An employer-sponsored account that allows employees to save pretax dollars to cover qualified medical or dependent care expenses.

Foreclosure – The legal process used to force the payment of debt secured by collateral whereby the property is sold to satisfy the debt.

401(k) Plan – A tax-deferred investment and savings plan that serves as a personal retirement fund for employees.

Health Savings Account – A tax-advantaged personal savings account, set up to be used exclusively for medical expenses; must be paired with a high deductible health insurance policy.

High-Deductible Health Plan – A health insurance policy that requires the policyholder to pay more out-of-pocket medical expenses but usually has lower premiums than traditional health insurance plans.

Individual Development Account (IDA) – A type of savings account, offered in some communities, for people whose income is below a certain level.

Individual Retirement Account (IRA) – A retirement plan, offered by banks, brokerage firms, mutual funds and insurance companies, to which individuals can contribute each year on a tax-deferred basis.

Inflation – A sustained increase in the prices of goods and services.

Installment Plan – A plan requiring a borrower to make payments at specified intervals over the life of a loan.

Insurance Premium – The amount of money required for coverage under a specific insurance policy for a given period of time. Depending on the policy agreement, the premium may be paid monthly, quarterly, semiannually or annually.

Interest – A fee for the use of money over time. It is an expense to the borrower and revenue to the lender. Also, money earned on a savings account.

Interest Rate – The percentage charged for a loan, usually a percentage of the amount lent. Also, the percentage paid on a savings account.

Investing – The act of using money to make more money.

Investor – An organization, corporation, individual or other entity that acquires an ownership position in an investment, assuming risk of loss in exchange for anticipated returns.

Leverage – The ability to use a small amount of money to attract other funds, including loans, grants and equity investments.

Liability – Money an individual or organization owes; same as debt. Also, a kind of insurance for the policyholder’s legal obligation to pay for either bodily injury or property damage caused to another party.

Lien – A creditor’s claim against a property, which may entitle the creditor to seize the property if a debt is not repaid.

Liquidity – The ease with which an investment can be converted into cash.

Load – The fee a brokerage firm charges an investor for handling transactions.

Loan – A sum of money lent at interest.

Management Fee – The fee paid to a company for managing an investment portfolio.

Market Value – The amount a seller can expect to receive on the open market for merchandise, services or securities.

Maturity – The time when a note, bond or other investment option comes due for payment to investors.

Money Market Account – A type of savings account offered by a financial institution.

Mortgage – A temporary and conditional pledge of property to a creditor as security for the repayment of a debt.

Municipal Bond – A bond issued by cities, counties, states and local governmental agencies to finance public projects, such as construction of bridges,schools and highways.

Mutual Fund – A pool of money managed by an investment company.

Net Worth – The difference between the total assets and total liabilities of an individual.

Par Value – The nominal, or face, value of a stock or bond, expressed as a specific amount on the security.

Predatory Lending – Targeting loans to seniors, low-income and other people to take advantage of their financial status or lack of financial knowledge.

Pretax – A person’s salary before state and federal income taxes are calculated.

Prime Rate – The lowest interest rate on bank loans, offered to preferred borrowers.

Principal – The unpaid balance on a loan, not including interest; the amount of money invested.

Promissory Note – A written promise on a financial instrument to repay the money plus interest.

Qualified Plan – A tax-deferred retirement plan for the self-employed.

Return – The profit made on an investment.

Revenue Bond – A type of municipal bond backed by revenue from the project the bond finances.

Risk – The possibility of loss on an investment.

Savings Account – A service depository institutions offer whereby people can deposit their money for future use and earn interest.

Stock Option – The right to buy or sell a corporation’s stock at a predetermined price or calculable formula; sometimes used as part of employee compensation.

Stockholder – A person who owns stock in a company and is eligible to share in profits and losses; same as shareholder.

Tax-deferred – Phrase referring to money that is not subject to income tax until it is withdrawn from an account,such as an individual retirement account or a 401(k) account.

Term – The period from when a loan is made until it is fully repaid.

Terms – Provisions specified in a loan agreement.

Treasury Bill – A short-term investment issued by the U.S. government for a year or less.

Treasury Bond – A government security with a term of more than 10 years; interest is paid semiannually.

Treasury Inflation-Protected Security (TIPS) – A Treasury bond or note that is tied to inflation so that the principal amount of the investment increases or decreases according to the annual inflation rate.

Treasury Note – A government security with a maturity that can range from two to 10 years; interest is paid every six months.

U.S. Savings Bond – A nontransferable, registered bond issued by the U.S. government in denominations of $50 to $10,000.

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