Financial Glossary
Always wondered what that
financial term meant? Use our comprehensive financial glossary to
look up the definition.
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A
Adjustable Rate Mortgage (ARM) - A mortgage with an
interest rate that can change based on changes in a specified index.
Adjusted Balance - An interest calculation
method used by some credit card issuers in which they subtract all payments
made during the month, then add the calculated finance charges.
Adjusted Gross Income (AGI) - The amount of your
income that is taxable. AGI consists of your gross income from taxable sources
minus certain items, such as payments to a Keogh plan or a deductible
Individual Retirement Account. AGI minus deductions and personal exemptions
equals your taxable income.
Amortization - The gradual reduction
of debt by periodic payments (for a specified period of time), that are large
enough to cover interest and principal.
Annual Fee - Yearly charge for the use of a credit card,
which is billed directly to your statement.
Annual Percentage Rate (APR) - The yearly cost of a
loan or credit, including interest and fees, expressed as a percentage rate.
Annuity - Regular periodic payments made by an insurance
company for a specified period of time.
Appraisal - A written opinion by a professional of the
market value of property.
Appreciation - The increase in value
of an investment over time.
Asked Price - The lowest amount at
which an investor is willing to sell a security or commodity.
Assessed Value - A public tax assessor's
appraisal of the value of an asset to calculate tax.
ATM - Automatic
Teller Machine.
Authorized User - Any person who has
permission to use a credit card account.
Average Daily Balance - An interest calculation
method used by credit card issuers. The average daily balance is determined by
adding each day's balance and dividing that total by the number of days in the
billing cycle. The average daily balance is then multiplied by a credit card's
specified periodic rate to compute interest due.
B
Balance Sheet - A listing of assets,
liabilities, and net worth as of a particular date. "Balance" refers
to the fact that assets equal liabilities plus net worth.
Balance Transfer - The process of moving
an unpaid credit card debt from one creditor to another.
Balance Transfer Fee - A fee charged for
transferring an outstanding balance from one creditor to another.
Balanced Funds - Mutual funds that
invest in a combination of stocks and bonds. Balanced funds are especially
suitable for retirees and nervous stock market investors because there is low
risk.
Bank - A commercial institution licensed as a taker of
deposits, banks are mainly concerned with making and receiving payments, and
supplying short-term loans to private individuals.
Bankruptcy - A court proceeding in which a debtor is
relieved of debt liability, in whole or in part, depending on the type of
bankruptcy filed. There are two primary filings: a Chapter 7 bankruptcy
declaration allows for the liquidation of assets and the discharge of most
debts; a Chapter 13 bankruptcy allows a borrower with a steady income to pay
off bills over a 36- to 60-month period.
Beneficiary - One who receives or is
designated to receive assets from a will, insurance policy, trust, retirement
plan, etc.
Bequeath - To transfer property to named heirs through a
will.
Bid Price - The amount for which a buyer is willing to
purchase a security or commodity.
Billing Cycle - The number of days
between the last credit card statement date and the current statement date.
Billing Statement - The monthly bill sent
by a creditor. It gives a summary of activity on an account, including balance,
purchases, payments, credits, and finance charges.
Biweekly Mortgage - A mortgage on which the
borrower pays half the monthly payment every two weeks, resulting in a total of
13 annual mortgage payments and an accelerated amortization.
Bond - A certificate of debt issued by a company or
the government. Bonds generally pay a specific rate of interest, and pay back
the original investment after a specified period of time.
Bond Fund - An income-producing mutual fund consisting of corporate,
municipal, or government bonds.
Broker - A person or firm that charges a fee or commission to act as
an intermediary between buyers and sellers of securities or property.
Bull Market - A term used to describe the stock market when prices of
securities are generally increasing.
C
Call - An
option that grants its owner the right to buy a specified amount of a security
or commodity at a specified price within a specified time. The opposite of a
put.
Call Price - The price at which a callable security can be redeemed by
the issuer.
Callable Bond - A security that may be redeemed by the issuer
before maturity. The term generally applies to bonds or preferred stocks.
Cap - The
maximum amount that an interest rate can increase on an adjustable-rate
mortgage, or the maximum amount of interest that will be paid on a bond issue.
Capital Gain - Profit from the sale of an asset or security.
Capital Growth - An increase in the market price or value of an
asset.
Capital Loss - Loss from the sale of an asset or security.
Capital Stock - The shares representing ownership interest in a
business, including preferred and common stock.
Capitalized Cost - The value of an asset used to calculate
depreciation.
Card Holder Agreement - The written statement of the terms and
conditions of a credit card account, as required by Federal Reserve
regulations. It must include the annual percentage rate, monthly minimum
payment formula, annual fee, if applicable, and the cardholder's rights in
billing disputes. The terms and conditions can be changed by the issuer upon
written notification to the cardholder.
Cash Advance Fee - A charge by the bank for using credit cards to
obtain cash. This fee can be stated in terms of a flat per-transaction fee or a
percentage of the amount of the cash advance.
Cash Flow - The difference between what you earn and your expenses.
Cash Value Life Insurance - Life insurance coverage that
incorporates a tax-deferred savings component in addition to providing a
certain death benefit.
Certificate of Deposit (CD) - An FDIC-insured investment that
guarantees a specific rate of interest for a specified period of time.
Certificate of Title - A legal document that lists a property's
current owner.
Certified Financial Planner (CFP) - Someone certified by
the Certified Financial Planner
Board of Standards to give financial advice. See also financial planner.
Certified Public Accountant (CPA) - Designation from the American Institute of Certified
Public Accountants awarded to those who pass an exam and meet specific
accounting related work experience requirements.
Charge Card - A card that requires a full payment of the charge by the
due date. Unlike credit cards, charge cards do not allow carrying a balance,
and no interest is charged. American Express and Diner's Club are examples of
charge cards.
Charge-Off - When your creditor elects to transfer a delinquent account
to a category called "bad debt" or "loss" and turns the
account over to a collection agency.
Check Card - A plastic card that automatically withdraws funds from your
checking account instead of a check, for purchases or cash.
Classic Card - Brand name for the standard card issued by VISA.
Closing - The process of finalizing the sale of property that
includes the transfer of title from the seller to the buyer. Also called
settlement.
Closing Costs - Fees and other expenses that must be paid by
buyers and sometimes sellers when transferring ownership of a property. Costs
typically include a loan origination fee, attorney's fee, advance on taxes
(which is placed in an escrow account), title insurance fees, recordation and
transfer taxes, and other fees. Also called settlement costs.
Co-Branded Cards - A type of affinity card issued through a
partnership between a bank and a retail company.
Collateral - The underlying security, mortgage, or asset pledged or held
in trust for the purpose of securitization or borrowing and lending activities.
Collection Agency - A company hired by a creditor to collect a debt
that is owed. Creditors typically hire a collection agency only after they have
made efforts to collect the debt themselves, usually through letters (called
"dunning") and telephone calls. Collection agencies are regulated by
the federal Fair Debt Collection Practices Act.
Collision Insurance - The type of auto insurance that covers damage
to your vehicle, resulting from a collision with another vehicle or object.
Commission - Compensation paid to a broker for acting as an agent in the
purchase or sale of securities or property.
Common Stock - Stock, other than preferred stock, that does
not pay dividends at a set rate, but offers a higher potential return.
Community Property - Refers to assets or a method of ownership.
Generally, it means that each spouse owns a 50 percent interest in an account.
Upon the death of one spouse, the survivor claims his or her ownership of
one-half of the asset. The other half will pass in accordance to a will or to
law. Each state has different laws and interpretations.
Compound Interest - Payment of interest, not only on principal
investment, but also on the interest accumulated in previous periods.
Comprehensive Insurance - The type of auto insurance which covers damage
to your vehicle, caused by events other than a collision, such as flood, fire,
hail, theft, or vandalism.
Conforming Loan - A conventional mortgage that conforms to the
loan amounts and mortgage guidelines used by the Federal National Mortgage
Association (FNMA or "Fannie Mae"), and/or the guidelines of The Federal
Home Loan Mortgage Corporation (FHLMC or "Freddie Mac").
Consolidation Loan - A single loan obtained to pay off multiple
loans. A consolidated loan may offer a lower monthly payment but a longer
repayment period. Also called debt consolidation.
Consumer - One who buys goods or services.
Consumer
Credit Counseling - A form of credit assistance for financially
distressed consumers who need help managing finances. Also called debt relief.
Contingency - A condition that must be met before a contract is legally
binding. Buyers and sellers often each add several contingencies.
Contract - An oral or written agreement to do or not to do a certain
thing.
Conventional Mortgage - A regular loan that may be privately insured,
but is not insured or guaranteed by the government.
Corporate Bond - A bond issued by a corporation.
Co-Signer - A person who signs a loan application with the primary
applicant and agrees to be equally liable for the balance.
Credit - A contractual agreement in which a borrower receives
something of value now and agrees to repay the lender at some later date.
Credit Bureau (Credit Reporting Agency) - A company that collects
and sells information about how consumers handle credit. The three major credit
bureaus are Equifax, Experian, and TransUnion.
Credit Card - A plastic card with a coded magnetic stripe that, when
signed, entitles its bearer to a revolving line of credit, whose size and interest
rate are determined by the borrower's credit worthiness. A card that allows you
to purchase items without cash and delays the payment for about 25 days. Some
credit cards carry annual fees, and all assess interest for charges that are
not paid by the end of the grace period. Other charges and fees may apply. See
affinity card, co-branded card, classic card, gold card, standard card, and
titanium card.
Credit History - Kept by a credit bureau, this record details a
person's line of credit and debt repayment history. It is used by lenders to
help determine if a potential borrower is a good risk.
Credit Insurance - An insurance policy that pays off debts should
the borrower lose their job, die, or become disabled.
Credit Limit - The maximum amount of credit granted to a
borrower.
Credit Report - A report of a person's credit history, prepared
by a credit bureau, that lists how individuals manage their debts and make
payments, how much untapped credit they have available, and whether they have
applied for any loans. The reports are made available to individuals and to
creditors who profess to have a legitimate need for the information.
Credit Score - A statistically derived, numerical score, based
on various characteristics of an individual's credit history, which measures
creditworthiness.
Creditor - A person or business from whom you borrow or to whom you
owe money.
Creditworthiness - Past and future ability to repay debts.
D
Daily Periodic Rate - The interest rate factor used to calculate interest
charges on a daily basis. The factor equals the annual percentage rate divided
by 365. See periodic rate.
Debit Card - A bank card with direct access to a cardholder's account,
usually a checking or savings account. The card acts like a check, with the
money withdrawn from the existing account balance.
Debt - An
amount of money owed from one person or firm to another.
Debt Service - The sum of monthly payments required on credit
cards, installment loans, home equity loans, and other debts, but not including
payments on the loan applied for.
Debtor - A person or entity (such as a bank) that owes money
Debt-to-Income Ratio - A measure of creditworthiness that calculates
your debts as a percentage of income, and is calculated by dividing the total
of your long-term debt payments by your gross income.
Deductible - Under an insurance policy, the amount of loss or expense
for which the insured is responsible before the insurance company begins
paying.
Deed - A
legal document that conveys title to real property.
Deed in Lieu (of Foreclosure) - When a homeowner can't make the mortgage
payments and can't find a buyer for the house, the lender may accept ownership
of the property in place of the money owed on the mortgage.
Default - An account on which the payments have not been made
according to the terms.
Defendant - A person charged in a legal action.
Deferred Annuity - An annuity that delays payments until the
holder elects to receive them.
Deflation - A decrease in the prices of goods and services.
Depreciation - Decrease in the value of an asset over time.
Derivatives - Financial instruments with returns that move in response to
some underlying asset or index.
Digital Certificate - A digital certificate is an electronic
document, which verifies the identity of the owner of a public key.
Disability Insurance - Insurance that replaces your income if you're
unable to work for an extended period due to illness or injury.
Discharge of Debts - A bankruptcy court's erasure of the debts of a
person or business that has filed for bankruptcy.
Dischargeable Debts - Debts that can be erased through bankruptcy.
Most debts incurred prior to declaring bankruptcy are dischargeable, including
back rent, credit card bills, and medical bills. Compare to non-dischargeable
debts.
Discount - The extent to which the price of an asset is lower than its
face value.
Discount Bond - A type of bond that is sold for less than face
value. The difference between the purchase price and the face value is the
interest received by the investor.
Diversification - The spreading of investment dollars among a
variety of different assets or securities in a portfolio to reduce the
potential risk or adverse impact of any single asset's poor performance
Dividends - Payment made by a company to its stockholders that is
usually a portion of profits.
Dollar Cost Averaging - Investing a fixed sum at regular intervals,
regardless of the share price, to reduce timing risk.
Dow Jones Industrial Average
- Widely
quoted stock index composed of 30 blue-chip stocks. The value of this index,
which does not include dividends, is calculated daily.
Down Payment - The portion of the purchase price usually paid
immediately upon purchase, in the form of cash or trade-in value.
E
Earnest Money - A deposit paid up front
as part of a purchase price, to demonstrate good faith on the part of the
buyer.
Electronic Fund Transfer (EFT) Systems - A variety of systems and
technologies for transferring funds electronically rather than by check.
Endorsement - A provision added to an insurance policy to add to or alter
the existing coverage. May be referred to as a rider.
Equity - Ownership interest in an asset. Also, a security which is
based on an ownership interest.
Escrow - A process in which a neutral third party holds documents,
money, or other property until agreed upon conditions are fulfilled.
Estate - All property owned by an individual at time of death.
Estate Planning - Arranging to make sure
your assets pass in an orderly and efficient manner to those who you want to
have them after your death.
Estate Taxes - Taxes levied by federal and state governments
on the transfer of your assets after you die.
Executor - A person named in a will to oversee the distribution of an
estate, as directed in the will.
F
Federal Deposit Insurance Corporation (FDIC) - An agency created by
the federal government to protect depositors against losses arising from the
financial failure of a bank.
Federal Insurance Contributions Act (FICA) - Law that mandates
employers withhold Social Security and Medicare taxes from wages.
Federal Reserve System - The nation's central banking system, designed
by Congress to help provide the United States with a safe and stable monetary
and financial system. It regulates U.S. monetary policy, and has the power to
influence key, short-term interest rates, and control the amount of money and
credit flowing through the U.S. economy
FHA Mortgage - A mortgage on which the lender is insured
against loss by the Federal Housing Administration, with the borrower paying
the mortgage insurance premium.
Finance Charge - The cost for using credit, comprised of
interest costs and other fees.
Finance Company - A business that makes consumer loans. The
interest rates charged by a finance company may be higher than those charged by
other creditors, and credit criteria may be more relaxed, allowing those with
problem credit to qualify.
Financial Planner - A financial adviser, ideally with broad
knowledge of all areas of personal finance. Fee-only planners are paid solely
by their clients—that is, they do not receive sales commissions or other
compensation from other sources. Fee-plus-commission planners charge fees for
advice and other services, and also on the sale of investment and insurance
products. See certified financial planner.
First Mortgage - The first-priority claim against real property
in the event the borrower defaults on the loan.
Fixed Annuity - Guaranteed payments fixed over the life of the
annuity.
Fixed Rate Mortgage - A mortgage on which the interest rate is
specified in the loan contract, and remains unchanged throughout the term of
the mortgage loan.
Flexible Spending Account - An employer-sponsored benefit that
allows employees to have pretax dollars withheld from their salaries to pay for
medical expenses and dependent-care expenses that were not reimbursed, such as
babysitting or eldercare fees.
Float - In
a mortgage transaction, the option which the borrower may exercise to allow the
rate and points to vary with changes in market conditions, rather than to
"lock in" those prevailing at that time. Also, in securities, the
number of shares outstanding and available for trading. In banking, the time
between deposit and payment of checks. In credit, the time between a charge
purchase and the date on which payment is due.
Forbearance - Voluntarily refraining from doing something, such as
asserting a legal right. For example, a creditor may forbear on its right to
collect a debt by temporarily postponing or reducing the borrower's payments.
Foreclosure - The legal process where the mortgage lender sells real
property in the event of a default. Proceeds are applied to the mortgage debt,
and the owner's right of ownership is terminated.
401(k) Plan - An employer-sponsored, tax-deferred, retirement savings
plan funded by employees with contributions that are deducted from pre-tax pay.
Employers frequently add matching contributions up to a set limit. Employees
are responsible for managing the money themselves by allocating the funds among
a selection of stock, bond, and cash investment funds. Investment gains are not
taxed until the money is withdrawn.
Fraud - Dishonest
and illegal practice.
Full Faith and Credit - An unconditional commitment to pay interest and
principal on debt; usually issued or guaranteed by the U.S. Treasury.
G
Garnishment - A legal proceeding in which money or property that is owed
to you is applied to the payment of the debt. Also called wage garnishment.
Gold Card - A credit card that offers a bigger line of credit,
generally $5,000 and up, than a standard card. Income requirements are higher,
usually a $35,000 minimum. In addition, issuers provide extra perks or incentives
to cardholders.
Good Faith Estimate - A preliminary estimate of the fees associated
with closing a loan that is given to you within three business days of
submitting a loan application.
Government Bond - A bond issued by the U. S. government. See glossary
entries for Treasury Bill, Treasury Bond, and Treasury Note.
Grace Period - A period of time when no interest or fees
accrue.
Graduated Payment Mortgage (GPM) - A type of mortgage that
allows for a lower initial payment that increases over time, and then levels
off. The difference between the lower initial payment and the required
amortized payment is added to the unpaid principal balance, and referred as
negative amortization
Gross Income - Salary and wages before income taxes are
deducted.
Growth Fund - A mutual fund that invests primarily in stocks for capital
appreciation, as opposed to current income.
Growth Stock - Stock of a company with a record of rapid
earnings growth, relative to its industry.
Guarantee - A promise by one party to pay a debt or perform an
obligation if the person with primary liability fails to pay or perform, as
required.
Guardian - The person legally designated as being responsible for the
minor children and/or personal property of another person.
H
Hazard Insurance - A type of insurance
that protects the policyholder against property damages caused by fire or a
severe storm.
Heir - A
beneficiary in a will.
Home Equity Line of Credit - A type of mortgage loan that provides
the ability to access funds at any time and any amount, up to the maximum
credit limit or line. Repayment is secured by a second mortgage, and is based
on the equity in your home. Specified interest paid is usually tax deductible.
Often used for home improvements, major purchases or expenses, and debt
consolidation.
Home Equity Loan - A fully funded loan, obtained for a variety of
purposes, secured by a second mortgage and based on the equity in your home.
Interest paid is usually tax deductible.
Home Inspection - An inspection by a professional of the
condition of the structure, electrical and plumbing systems, and other
mechanical systems of a home being purchased.
Homeowner's Insurance - An insurance policy that covers a homeowner
against damages to property. It also includes liability protection for lawsuits
from people injured while on the premises.
Household Income - The total income of all members of a household.
An important measure used by creditors evaluating applications for joint
credit.
I
Immediate Payment Annuity - An annuity purchased with one payment.
Payments begin immediately.
Impound Account - Portion of the borrower's monthly mortgage
payment that is held by the lender to pay for property taxes, hazard insurance,
mortgage insurance, ground rent, and other items as they become due. Also
called escrow account.
Income Fund - A mutual fund that seeks current income, rather than
capital growth.
Index - A
published, market-based figure used to establish a lending rate. Common indices
include the one-year Treasury Constant Maturity Yield, the Federal Home Loan
Bank (FHLB) 11th District Cost of Funds, and the prime rate, as listed in The
Wall Street Journal.
Index Fund - A type of mutual fund that seeks to mirror a broad-based
index, such as the S&P (Standard & Poor's) 500 stock index. Because
they are not actively managed, these funds usually have low management fees.
Indexed Rate - The sum of the published index, plus the
margin, in an adjustable rate mortgage.
Individual Retirement Account (IRA) - A tax-deferred
investment account that an employed individual establishes to provide
retirement funds.
Individual Retirement Account Rollover - The movement of
qualified retirement funds from one account to another in order to avoid
taxability and penalty. The rollover must occur within 60 days into an
IRA-qualified retirement account.
Inflation - An increase in the prices of goods and services that is
generally expressed as an annual percentage increase in the Consumer Price
Index, as compiled by the Department of Labor.
Installment Loan / Installment Credit - An account in which the
debt is divided into amounts to be paid successively at specific intervals set
by the terms of the loan.
Interest - The cost of borrowing money. Also, the earnings on invested
money.
Interest Rate - The fee charged or paid for money lent,
expressed as a percentage of the principal.
International Fund - A mutual fund that invests in foreign
securities.
Intestate - To die without a will.
Introductory Rate - The low rate charged by
a lender for an initial period to encourage borrowers to accept the credit
terms. After the introductory period is over, the rate charged increases to the
indexed rate or the stated interest rate. Often called a teaser rate or intro
rate.
Investment - An asset or item of value
that is purchased to generate a profit at some future point.
Investor - A person who makes investments.
J
Joint Credit - Any account owned by
two or more people where all parties are responsible for repaying the debt.
Judgment - A court verdict that requires a person to do something,
such as pay a debt.
K
Kappa - The ratio of the dollar
price change in the price of an option to a 1% change in the expected price volatility.
L
Late Payment Fee - Charge to customer whose monthly payment has
not been received as of the due date or stated deadline for payment, as shown
on the billing statement.
Lease - A
contract that allows you to use or occupy property (such as a car, an apartment
or a computer) for a set amount of time, during which you make regular
payments.
Liability - A financial obligation or other amount you owe.
Liability Insurance - Insurance coverage that protects you against
injuries you cause to other people, or damage you cause to their property.
Lien - A
secured claim upon a piece of property for the payment or satisfaction of a
debt or obligation.
Life Expectancy - The age to which half of the people in an age
group are expected to live.
Liquidity - A measure of the ease with which an asset can be converted
to cash without the loss of principal.
Living Will - A legal document that voices your medical decisions if you
are unable to speak for yourself as a result of medical incapacitation.
Load - The
sales commission charged when you buy or sell shares from a mutual fund.
Load Fund - A mutual fund that carries a sales charge.
Loan - When
a lender gives money or property to a borrower, and the borrower agrees to
return the property or repay the borrowed money, along with interest, at a
predetermined date in the future.
Loan Commitment - A written agreement between lender and borrower
to loan money at a future date, subject to the specified terms and conditions.
Loan-to-Value Ratio (LTV) - A ratio expressed as a percentage,
determined by dividing the loan amount by the sales price or appraised value,
expressed as a percentage.
Lock In - A commitment obtained from a lender assuring a particular
interest rate or feature for a specified time period. Provides protection
should interest rates rise between the time you apply for a loan, acquire loan
approval, and, subsequently, close the loan.
Long-Term Care Insurance - Insurance that provides some coverage for
nursing home stays, and home health care for people with disabling conditions.
M
Margin - In an adjustable rate mortgage, the amount added to the
interest rate index, to calculate the new indexed interest rate. Also,
borrowing money from a broker to purchase securities.
Market Timing - Shifting money in and out of investment markets
in an effort to take advantage of rising prices and avoid downturns.
Market Value - The price at which buyers are willing to buy
and sellers are willing to sell.
Maturity - The date a debt is due for payment.
Medicaid - The government program that provides health
care assistance for the poor.
Medicare
- The
government program that provides health care assistance for older and disabled
people.
Minimum Payment - The minimum amount, usually 2-3 percent of the
outstanding balance, a cardholder can pay to keep a credit card account from
going into default.
Money Market Account - A federally insured,
demand account available through banks, credit unions, and savings and loan
associations. Not to be confused with a money market mutual fund; which is not
insured.
Money Market Mutual Fund - A type of mutual fund that invests in stable,
short-term securities. These funds are designed to be easily convertible into
cash, and are structured to maintain an unchanging value of $1 a share. Only
the yield is supposed to fluctuate.
Monthly Periodic Rate - The interest rate factor used to calculate the
interest charges on a monthly basis. The factor equals the annual percentage
rate divided by 12. See periodic rate.
Mortgage - A loan secured by real estate, where the borrower allows
the lender a lien on the property as security until the loan is repaid
Mortgage Insurance - Insurance that protects the lender against loss
in the event a mortgage borrower defaults. Also called private mortgage
insurance.
Municipal Bond - A bond issued by a state or a political
subdivision, such as a county, city, town, or village. The term also designates
bonds issued by state agencies and authorities. Interest payments from
municipal bonds are generally free from federal income taxation.
Mutual Fund - A mutual fund is a pool of money managed by an investment
company, which raises money from shareholders and invests in stocks, bonds,
options, commodities, or money market securities. A mutual fund offers the
advantages of diversification and professional management, for which the
investment company charges a fee.
N
NASDAQ - The National
Association of Securities Dealers Automated Quotation System. Often referred to
as the over-the-counter market, the NASDAQ is a computer-based, securities
exchange that does not have a physical trading location. Transactions are
carried out via telephone and computer networks.
Negative Amortization - An increase in a mortgage loan balance that
occurs when the monthly payment is too small to cover the principal and interest
due. The amount of the shortfall is added to the remaining balance to be repaid
later. See graduated payment mortgage.
Negotiable Instrument - A written document that represents an
unconditional promise to pay a specified amount of money upon the demand of its
owner. Examples include checks and promissory notes. Negotiable instruments can
be transferred from one person to another, as when you write "pay to the
order of" on the back of a check and turn it over to someone else.
Net Worth - The difference between a person's assets and liabilities.
No Load Fund - A mutual fund that has no sales commission.
Non-Dischargeable Debts - Debts that cannot be erased through bankruptcy.
Examples of non-dischargeable debts include alimony, child support, many student
loans, and most income tax debts. Compare to dischargeable debts.
Non-Profit Corporation - A business entity formed for civil, social, or
charitable purposes for which the generation of profit is not part of its
function. Non-profit corporations are taxed differently, and are incorporated
differently than for-profit business organizations.
O
Open-End Credit - A line of credit that may be used over and over
again, including credit cards, overdraft credit accounts, and home equity
lines.
Origination Fee - A loan processing fee paid to the lender as a
percentage of the loan amount, where one percent equals one point.
Outsource - To have a service performed or a function completed by
others outside of the company primarily offering the service.
Overdraft Checking - A checking account with a line of credit that
allows the borrower to write checks or draw funds for more than the actual
account balance.
Over-the-Limit Fee - A fee charged for exceeding the credit limit on
a credit card.
P
Penalty Rate - Several percentage points higher than a credit
card's current annual percentage rate, which goes into effect after a
predetermined number of late payments.
Periodic Rate - The interest rate described in relation to a
specific amount of time. The monthly periodic rate, for example, is the cost of
credit per month. The daily periodic rate is the cost of credit per day.
Personal Identification Number (PIN) - A secure code used to
access bank or credit card accounts at ATM's or point-of-sale locations.
Personal Loan - A loan secured by property other than real
estate, or unsecured.
PITI - Shorthand
for Principal, Interest, Taxes, and Insurance, which are the components of a
monthly mortgage payment.
Platinum Card - A credit card with a higher limit and more
perks than a gold card.
Plaintiff - The person who institutes a suit in a court.
Points - Charges paid to the lender, usually at closing. One point
is 1% of the mortgage face amount.
Policyholder - A policyholder is a person who pays a premium
to an insurance company in exchange for the protection detailed in an insurance
policy.
Portfolio - The securities or investments owned by an individual.
Power of Attorney - A legal document that allows someone to appoint
an attorney in fact to conduct personal and financial business, even in the
event of legal incompetence. It expires upon the giver's death.
Pre-Approval - A process used to assess a prospective
borrower's ability to pay back a loan. It determines how much money a
prospective homebuyer can borrow before an actual application is made.
Preferred Stock - A class of stock that generally pays dividends
at a set rate, and is given preference with regard to the payment of dividends
and the distribution of corporate assets in the event of liquidation. Preferred
stock generally does not have voting rights.
Premium - The fee you pay for insurance, usually a recurring expense
paid at fixed intervals.
Prepayment Penalty - A charge imposed by the lender if a borrower
pays off a loan early. The charge is usually expressed as a percent of the loan
balance at the time of the prepayment.
Prequalification - A process used to assess a prospective
borrower's ability to pay back a loan. It determines how much money a
prospective homebuyer can borrow before an actual application is made.
Previous Balance - An interest calculation method used by some
credit card issuers where finance charges are based on the amount owed at the
end of the previous billing cycle.
Prime Rate - The interest rate banks use to price loans to their best or
"prime" customers. Many institutions quote prime rates established by
large money center commercial banks, such as Citibank or Chase Manhattan. There
is also a prime rate average listed in The Wall Street Journal that is
an average of the largest commercial banks.
Principal - The original or remaining amount of money invested or lent,
not including profits or interest earned or due on that money.
Probate - The process of distributing a deceased person's estate.
Profit Sharing Plan - A compensation plan funded by employer
contributions, based on a share of the company's profits. Compensation can be
in the form of stocks, bonds or cash, and can be immediate or deferred to a
future date.
Public Offering - Sale of stock by a corporation to the public.
Put - An
option that grants its owner the right to sell a specified amount of a security
or commodity at a specified price within a specified time. The opposite of a
call.
Q
Qualified Retirement Plan - A retirement plan that meets certain
Internal Revenue Service (IRS) regulations and is eligible for tax deferment
and in certain cases tax deductible.
Qualifying Ratios - The ratio of your fixed monthly expenses to
your gross monthly income, used to determine how much you could afford to
borrow. The fixed monthly expenses would include PITI along with other
obligations such as student loans, car loans, or credit card payments, which are
divided by your gross monthly income.
R
Real Property - Another term for real estate. It includes land
and things permanently attached to the land, such as trees, buildings, and
stationary mobile homes. Anything that is not real property is termed personal
property.
Rebate Card - A credit card that allows the customer to accumulate cash,
merchandise, or services based on charges.
Refinancing - Paying off one loan with the proceeds from another loan.
Replacement Cost Coverage - Homeowner's insurance that pays the cost
to replace or repair the insured home or possessions, up to the policy's set
maximum. Provides more protection than actual cash value coverage.
Reverse Mortgage - An equity loan that allows a homeowner to
receive tax-free payments on a monthly basis up to the credit limit, which is
based on equity in the home.
Revolving Line of Credit - An agreement to lend a specific amount to a
borrower, and to allow that amount to be borrowed again once it has been
repaid. Most credit cards offer revolving credit.
Rider - A provision added to an insurance policy to
add, amend, or alter the original coverage.
Risk - The
degree of uncertainty regarding the rate of return on and/or the principal
value of an investment.
Roth IRA - A tax-deferred retirement account. Contributions to a Roth
IRA are not tax deductible, but there is no tax on withdrawals as long as the
taxpayer is age 59 ½ and the account has been open for five years.
S
Second Mortgage - The second-priority claim against a property in
the event that the borrower defaults on the loan. A riskier form of lending
since the lender who holds the second mortgage gets paid only after the lender
holding the first mortgage is paid.
Secured Card - A credit card that a cardholder secures with a
savings deposit to ensure payment of the outstanding balance if the card holder
defaults on payments. It is typically used by people new to credit, or those
trying to rebuild their poor credit ratings.
Secured Debt - A debt on which collateral has been pledged by
the borrower. The creditor can institute a foreclosure or repossession, or take
the property identified by the lien, called the collateral, to satisfy the debt
if you default. Compare to unsecured debt.
Securities - Stocks, bonds, or other types of investments that represent
equity ownership or a debt obligation of an organization.
Securities and
Exchange Commission (SEC) - The federal government agency that enforces
federal securities laws.
Securities
Investor Protection Corporation (SIPC) - An agency created by the federal
government to protect investors against losses arising from the failure of a
brokerage firm. It does not protect investors against losses arising from fluctuating
securities prices.
Servicing - Term used to describe the administration of mortgage loans
between the time of loan disbursement and the time the loan is fully paid off.
This includes collecting monthly payments from the borrower, maintaining records
of loan progress, assuring payments of taxes and insurance, and pursuing
delinquent accounts.
SIMPLE IRA - A Savings Incentive Match Plan for Employees (SIMPLE) IRA
is a tax-deferred retirement plan that may be used by a sole proprietor, or
offered by a small business that doesn't contribute to any other retirement
plan.
Simplified Employee Pension (SEP) - This type of pension
allows you to make contributions to your own retirement plan, if you're
self-employed, and to your employees' plan.
Social Security
- A U.S. government program providing economic assistance to the unemployed, disabled, or aged,
which is financed by the taxation of workers and employers. It includes several
programs, including, retirement insurance, disability insurance, and
supplemental security insurance.
Spread - The difference between the bid price and the asked price of
a security or commodity.
Standard Card - The basic credit card offered by issuers
Standard Deduction - The fixed amount you can deduct from your
taxable income if you do not itemize your deductions. About 70% of all
individual income tax returns use the standard deductions.
Stock - An
equity security that evidences ownership interest in a corporation. Holders of
stock may have certain rights, including the right to receive dividends and the
right to elect members to the board of directors of the corporation. See common
stock, preferred stock.
Stock Certificate - A document that provides physical evidence of
stock ownership.
Stock Dividend - A dividend paid in stock rather than cash. The
dividend may be additional shares of the issuing company, or shares of another
company (usually a subsidiary) held by the issuing company.
Stock Fund - A mutual fund that invests primarily in stocks.
Stock Split - A division of the outstanding shares of a corporation into
a larger number of shares. The number of shares increases, but the total value
remains the same.
Strike Price - In an option contract, the stated price the holder
can either buy or sell upon exercise of the option.
Surrender Value - The amount of money a policyholder would
receive after canceling a life insurance policy.
T
Tax Deferred - An investment with earnings and/or
contributions that are taxed at a later date.
Tax Free - Investments whose earnings are never taxed. For example,
municipal bond fund dividends are never taxed at the federal level. However,
you may still have to pay capital gains taxes if you sell them at a profit.
Teaser Rate - The low rate charged by a lender for an initial period to
encourage borrowers to accept the credit terms. After the introductory period
is over, the rate charged increases to the indexed rate or the stated interest
rate. Often called a teaser rate or intro rate.
Term Life Insurance - Life insurance that
covers you for a fixed period of time.
Thrift - Another name for a savings & loan.
Titanium Card - A credit card with an even higher limit than a
platinum card.
Title - A
legal document evidencing property ownership or a right of ownership.
Title Insurance - Insurance that protects the policyholder
against loss arising from disputes or claims regarding ownership of a property.
Total Debt Ratio - Total monthly debt plus housing payments
divided by your gross monthly income. Also known as Obligations-to-Income Ratio
or Back-End Ratio.
Total Return - A security's total return reflects not only the
income that it pays out from interest or dividends, but also any change in its
share price or principal value.
Trade-In Value - The amount a dealership will credit you for a
vehicle you provide as partial or full payment for another vehicle.
Transaction Date - The date goods and services are purchased, or
the date a cash advance is made
Treasury Bill - Fixed-income security issued by the U.S. government having a maturity of less than one year at issue. Backed by the
government's full faith and credit (unconditional commitment to pay).
Treasury Bond - Fixed-income security issued by the U.S. government having a maturity of more than 10 years at issue. Backed by the government's
full faith and credit (unconditional commitment to pay).
Treasury Note - Fixed-income security issued by the U.S.
Government having a maturity of two to ten years at issue. Backed by the
government's full faith and credit (unconditional commitment to pay).
Trustee - An individual or organization that is given legal
responsibility to manage assets in the best interest of, or for, the benefit of
another.
Two-Cycle Billing - With the two-cycle method, the average daily
balance is calculated from two billing cycles rather than one, and finance
charges are typically higher. This method, in effect, wipes out the grace
period for customers who carry a balance. If the bill is not paid in full at
the first billing, interest becomes retroactive back to the purchase date.
U
Umbrella Liability Coverage - Supplemental liability
insurance, providing increased protection against lawsuits or other losses for
which you are legally responsible.
Underwriting - The process of verifying data and approving a
loan.
Unearned Income - Income derived from investments and other
sources not related to employment.
Universal Life Insurance - A cash value life insurance policy that
provides life insurance protection and a savings component, with a guaranteed
rate of return.
Unsecured Debt - Debt, such as most credit cards, that is not
secured with collateral. Compare to secured debt.
Unsecured Loan - A loan based on your promise to pay without
savings or other collateral as a guarantee; sometimes called a signature loan.
V
VA Mortgage - A mortgage, of which only Veteran's are eligible, where the
lender receives a guarantee to reduce loss from the Veteran's Administration (VA). The major advantage of a VA
mortgage is that the required down payment is very low, and maximum allowable
loan amounts are higher than on FHA loans.
Variable Annuity - Payment amounts are not guaranteed, but are
based on the performance of the investment.
Variable Interest Rate - An interest rate that changes up or down on a
set schedule based on an economic index such as the prime rate.
Variable Life Insurance - This type of insurance provides coverage for your
entire life and builds up savings over time. You can invest your savings in a
menu of mutual funds, which generally are managed by the insurance company.
W
Whole Life Insurance - A life insurance policy that remains in effect
for your entire life.
Will - A
legal document that specifies how assets will be distributed upon death.
Workers Compensation - Employer-paid insurance required by law that
compensates employees who are injured on the job.
X
Y
Yield -The
rate of return on an investment, usually expressed as a percentage rate. It
doesn't include capital gains or losses.
Z
Z bond - Also known as an accrual
bond or accretion bond; a bond on which interest accretes interest but is not
paid currently to the investor but rather is accrued, with accrual added to the
principal balance of the Z and becoming payable upon satisfaction of all prior
bond classes.
Zero-balance account (ZBA) - A checking account in
which zero balance is maintained by transfers of funds from a master account in
an amount only large enough to cover checks presented.
Financial Debt Glossary