Financial Terms & Definitions

401(k) Plan - A retirement savings plan sponsored by a company for the benefit of its employees. The employees contribute a fixed amount to the plan out of their paychecks, before federal income taxes are withheld. The amount contributed to the plan accumulates tax-free until the employee reaches age 59 1/2. Some companies match a portion of their employees' contributions.

Adjustment Period - The time between changes to the interest rate as dictated by fluctuations of the index for an adjustable rate loan.

Adjustable Rate Mortgage (ARM) - A mortgage loan with an interest rate that changes at regular intervals, based on an established index.

Amortization - Process of discharging a debt by a set of regular equal or unequal payments that include the amount borrowed and interest owing.

Annual Fee - A yearly fee, typically associated with a credit card or revolving credit plan.

Annual Percentage Rate (APR) - The cost of credit, expressed as a yearly rate. APR is generally not the same as the contract interest rate.

Annuity - Contracts issued by life insurance companies that provide an income for a specified period of time, such as a number of years or for life.

Appraisal - The estimated value of a property.

Arbitrage - The simultaneous buying and selling of a product to take advantage of price differences.

Asset - A commodity or quality that is useful or valuable.

Balance - The amount of money outstanding in an account.

Bankruptcy - A legal proceeding in U.S. Federal Court, entered into by borrowers who are unable to pay their debts. In Chapter 13 bankruptcy, the borrower files a payment plan with the court and promises to make partial payments to creditors. In Chapter 7 bankruptcy, a trustee may sell the borrower's assets and use the proceeds to repay the creditors. Both types of bankruptcy stay on the borrower's credit history for up to 10 years.

Balance Sheet - Statement of an individual's organization's assets, liabilities and equity at a given date.

Bonds - Fixed interest investments whereby the individual receives a number of payments at fixed intervals until the bond is repaid.

Borrower - An individual, or organization, who obtains or receives something, such as money, with the intention of repaying it.

Broker - An agent who, for a fee or commission, carries out transactions such as buying and selling of shares for a client.

Budget - A financial plan to manage the spending and saving of money.

Cap Rate - Annual return on an investment before mortgage payments and income taxes

Call Option - an option where the buyer has the right, but not the obligation, to buy the underlying asset at a predetermined price before a specified date.

Cash Advance - Cash charged against a credit card. Since the advance is really a loan, interest is charged from the date of the advance.

Certificate of Deposit (CD) - Short-term debt instrument mainly issued by banks on behalf of corporates requiring short-term funding.

Charge Card - A card that charges no interest, but that requires you to pay your bill in full each month.

Chattels - These are the items included with a property that are not fixed to the property.

Checking Account - Money kept in a bank or savings and loan for safekeeping. Money can be easily withdrawn by writing checks or using an ATM or debit card.

Closing Cost - Fees paid at the closing of a real estate secured loan. These may include an appraisal fee, title search and insurance, survey, taxes, deed, recording fee, credit report charge and other costs assessed at settlement.

Collateral - An asset pledged as security to ensure payment of debt.

Compound Interest - Interest computed on the balance of a loan, in which the balance includes all unpaid interest.

Credit - A promise to pay at a later date for goods or services purchased today.

Credit Application - A written request for credit, generally in a form specified by the lender. Sometimes, an application fee is charged to cover the cost of loan processing.

Credit Card - A plastic card issued by a bank authorizing payment for purchases. Interest is charged on the outstanding balance.

Credit Counseling - Professional counseling provided by organizations that help consumers find ways to repay their debt - through careful budgeting and management of money.

Credit Limit - The maximum amount of money that may be charged on a credit card account.

Credit report - A record of someone's credit history, including debt repayments, late payments and any bankruptcies that is compiled by a credit reporting agency.

Creditor - A person or business from whom you borrow, or to whom you owe, money.

Currency Exchange - A business that provides a number of services for a fee, such as license plate renewal, check cashing and fund wiring.

Debenture - A medium to long term loan agreement secured by assets of the borrower.

Debit Card - A plastic card issued by a bank and used for making purchases. The purchase amount is deducted directly from your checking account.

Debt - Money owed to another party.

Debt Consolidation - A strategy sometimes used by consumers to better manage their debt problems. Rather than paying off several separate bills each month, a consumer consolidates his or her debts with a financial institution that will arrange for one lower monthly payment extending over a period of time.

Default - Failure to repay a loan or otherwise meet the terms of a loan agreement.

Depreciation - The allocation of the costs of a long-term asset to the periods benefiting from its use. Represents a non-cash expense.

Discretionary Income - Individual or family income available for spending after all fixed and necessary expenses (such as food, clothing and shelter) have been paid.

Disposable Income - Personal income less personal tax and non-tax payments.

Diversification - Practice of spreading risk by investing in a number of different assets.

Dividends - The portion of a company's net profit paid to its shareholders.

Down Payment - A sum of money put down to buy a house, car, or other large item. This is a portion of the purchase price which is generally required by the seller to be paid in cash upfront.

Endowment Fund - An account that is invested to earn a return of income and growth of which a percentage of the account value is used each year for a specified charitable purpose.

Equal Credit Opportunity Act - A federal law prohibiting lenders from discriminating against applicants for credit.

Equity - The market value of a person's home or real estate, less the value of all existing liens.

Exchange Rate - The price at which one foreign currency can be exchanged for another.

Fair Credit Reporting Act - A federal law giving consumers the right to learn what information credit reporting agencies have on file about them and to dispute any inaccurate data in the file.

Fair Debt Collections Practices Act - A federal law to protect consumers from any harassing or abusive conduct, the use of false or misleading representations or unfair practices in the collection of debts.

Federal Deposit Insurance Corporation (FDIC) - A federal agency that insures consumer deposits in a bank or savings and loan for up to $100,000 per account. Deposits include checking and savings accounts and certificates of deposit.

Fixed Interest Mortgage - Mortgage where the interest rate is set at the beginning of the period and does not change.

Floating Rate Mortgage - Mortgage where the interest rates rise and fall.

Foreclosure - A legal process in which property that is collateral or security for a loan may be sold to help repay the loan when the loan is in default.

Futures Contract - An exchange-traded, legal contract between a buyer, who agrees to take delivery of a specified asset at a predetermined time, and a seller who agrees to deliver the asset.

Home Equity Loan - A loan secured by a person's home.

Inflation - Increase in the level of prices as a result of changes in demand or money supply.

Installment Loan - A loan in which the amount of payment and the number of payments are predetermined.

Interest - The dollar amount a lender charges a customer for borrowing money.

Interest Rate - The rate that lenders charge their borrowers for the privilege of borrowing money.

Internal Rate of Return (IRR) - The percentage return that discounts all cash flows from a project, including the investment outlay, to zero.

Invest - To apply or put money to some use in order to defer consumption and receive a return in the future.

Landlord - Person who owns or leases property.

Late Payment Fee - A fee charged for a loan payment not received by the due date.

Lease - A contract that allows a consumer to use an asset, such as a car, in exchange for payment. At the end of the lease term, the asset must be returned.

Lender - A person or business from whom one borrows or to whom one owes money. Also referred to as a creditor.

Leverage - The financial advantage of an investment that controls property of greater value than the cash invested. Leverage is usually achieved through the use of borrowed money.

Liability - Debts of an individual or company that represent obligations for repayment.

Lien - A claim placed by a creditor on a piece of real estate, or property, to ensure the payment of a debt.

Line of Credit - The maximum loan amount a consumer can borrow against in an account. As a credit line is partially or fully repaid, the consumer can borrow against the account again.

Loan - An amount borrowed to be repaid at a later date, with interest.

Loan Agreement - A contract that spells out in detail the terms and conditions of a loan.

Loan to Value Ratio (LTV) - The ratio of money borrowed on a property to the property's fair market value.

Margin - Percentage points added to the index and used to determine the interest rate of an adjustable rate mortgage loan. The margin may differ from one lender to another, but it is usually constant throughout the life of the loan.

Maturity Date - The date on which final, or last, payment on a loan is due.

Minimum Payment - The smallest amount a borrower must pay each month on a loan or credit card account.

Mortgage Loan - A loan used for the purchase of a home. The home serves as security, or collateral, for the loan.

Net Present Value (NPV) - A sophisticated capital budgeting technique; found by subtracting a project's initial investment from the present value of the net cash inflows discounted at a rate equal to the firm's cost of capital.

Net Worth - Represents the amount of money a person would have left over if all their assets were sold to pay off their debts.

Nominal Interest Rate - Interest rate that includes inflation.

Overdraft - A short-term loan where a bank gives permission to a borrower to have a negative bank balance up to a pre-arranged limit.

Over-the-Counter Market - A market that is not organized by an exchange organisation.

P/E ratio - The price earnings ratio is used to measure how cheap or expensive share prices are. It is calculated by dividing the market value of a company by the earnings of the company.

Prepayment Penalty - An additional fee a lender may charge if a borrower pays off all or part of the loan balance before a period chosen by the lender or before the loan is due.

Principal - The outstanding balance owing on a loan.

Public Record - Information obtained from local, state or federal courts indicating a person's history of meeting financial obligations, including alimony and child support.

Refinance - Paying off an existing loan with the proceeds from a new loan.

Repossess - Forced or voluntary surrender of merchandise as a result of a consumer's failure to repay a loan as promised.

Put Option - An option where the buyer has the right, but not the obligation, to sell an underlying asset at a predetermined price before a specified date.

Return on Investment (ROI) - The profit from an investment as a percentage of the investment outlay.

Savings Account - Money kept in a bank or savings and loan association for safekeeping. Savings accounts earn interest on all money kept in the account.

Savings Bond - A government bond that earns interest, issued in face value denominations from $50 to $10,000. Interest on the bond accumulates tax free.

Secured Loan - A loan in which a borrower pledges an asset such as a home or car that may be sold if the borrower is unable to repay the loan.

Securities - The type of financial instruments used to finance and organization's operations.

Securitization - The process of repackaging and grouping loans so they have the characteristics of more liquid securities. For example, many of the mortgage loans in the US have been repackaged into securities called collateralized mortgage obligations.

Shares - An entitlement to a proportion of the ownership of a company or firm.

Simple Interest - Interest computed on the principal balance outstanding as long as any portion remains unpaid.

Speculator - A market player who takes on risk in order to make a potential profit.

Strike Price - The price at which an option is to be settled or exercised.

Term - The time between the beginning of an annuity's first payment and the end of its last payment.

Title - A legal document that provides evidence of property ownership.

Truth in Lending Act - A federal law that requires lenders to disclose to the borrower the true cost of a loan, including the actual interest rate and all terms and conditions of the loan, in a manner that is easily understood.

Unsecured Loan - A loan granted based only on the borrower's promise to repay.

Variable Interest Rate - An interest rate that changes based on an index, such as the prime rate.

Yield - The percentage rate of return paid on a stock in the form of dividends or the effective rate of interest paid on a savings or money market account or bond.