Glossary: Spending & Credit

Accrued interest The amount credited to an account between the date of the last payment and the date when the account is closed.

Adjustable rate mortgage Mortgage whose interest rate changes periodically based on the upward or downward movement of a specified reference rate—for example, six-month or one-year Treasury bills.

Amortization Process of gradually reducing a debt through installment payments of principal and interest instead of paying off the debt all at once.

Annual percentage rate (APR) Annual rate of interest paid by a borrower that includes specified fees and charges, as dictated by law and regulation.

Asset Anything with commercial value that is owned and adds to one’s net worth. Usually refers to items that can be sold and converted to cash.

Balance sheet An accounting statement that shows the amount of a company or individual’s assets, liabilities, and net worth on a certain date.

Basis point Smallest measure used in quoting yields on mortgages, bonds, stock, notes, etc. One basis point equals one one-hundredth of a percent of an asset’s value. For example, the difference between a yield of 6.25 percent and 6.50 percent is 25 basis points.

Book value Value of an asset, calculated as actual cost minus allowances for depreciation. Book values can be more or less than market values.

Capital Cash or other resources accumulated and available for use in producing wealth. Assets that are invested in a venture.

Cash flow Difference between income and expenses.

Certificate of deposit (CD) Short-term debt security with a maturity from a few weeks to several years. Interest rates are established by market demand and competition. A type of savings account.

Collateral Anything of value pledged by a borrower to secure a loan.

Compound interest Interest credited daily, monthly, quarterly, semiannually, or annually on both principal and previously credited interest.

Consumer
A person who uses credit for personal, family or household purposes.

Contract Binding agreement between two or more parties.

Credit Ability to purchase something today with a promise to pay later.

Credit card Account with a financial institution, such as a bank, where credit is extended for the purchase of products or services from participating stores or vendors by using a plastic card.

Credit history Record of a person’s paying habits for both current and past credit accounts (loans, mortgage loans, car loans, credit cards, cellular phones, and so forth).

Creditor
The person or company you owe money to.

Credit scoring Mathematical formula developed by a credit scoring company to determine a person’s creditworthiness. Usually numbers are given in hundreds, such as 752 or 861. Included in the formula is how much debt the person has, how well the debt is serviced (see “debt service”), and what the person’s “debt-to-income ratio” is (see definition).

Four C’s of credit Capacity, character, capital, and collateral. Capacity is income availability to service debt; character is honesty, reliability, and willingness to service debt; capital is financial worth; and collateral is property or security that can be offered or pledged to secure the loan.

Debtor
The person who owes the money.

Debt-to-income ratio Percentage of monthly income used for paying existing debt. Generally, most lenders are looking for a ratio of between 32 and 35 percent.

Depreciation Decline in value of business facilities and capital goods owing to the predictable wear and tear over their operating lives, often amortized for tax purposes over a prescribed number of years. See also “amortization.”

Derogatory items Red flags to lenders; usually things such as collections, unpaid bills, tax liens, foreclosures, deed in lieu, garnishments, and more.

Discount Selling a security (usually a bond) for a price lower than its face value.

Discount interest rates Interest rate charged by Federal Reserve Banks on loans to member banks. The Federal Reserve can directly affect business growth by raising or lowering discount rates.

Discretionary income Amount of a consumer’s income available for spending after the essentials have been met.

Down payment Amount of money a buyer gives to the seller, representing a small percentage of the total purchase price. For example, 10 percent down payment on a $100,000 house is $10,000.

Economic risk Investment risk associated with the overall health of the economy of the country or locality in which the investment is made.

Effective yield The way total return is usually expressed when a certificate of deposit (CD) is held until maturity, reflecting the effect of compounding interest during the holding period.

Equity Synonym for ownership or a share of ownership (for example, stock or real estate holdings). In finance, equity is synonymous with stock and real estate.

Expense charges Costs deducted from account assets for investment management, administration, and distribution services. Deductions are from the assets of each account, including the accumulation and annuity funds.

Face value Value that appears on the face of a bond and indicates the value of the bond at maturity. Usually, corporate bonds are issued in face values of $1,000, municipal bonds at $5,000, and federal bonds at $10,000. Face value is not an indication of market value.

Federal Reserve Board Seven-member board appointed by the U.S. president to set monetary policy, including discount interest rates, bank regulations, and the availability of credit.

Financial planner Person who helps individuals in the ongoing process of arranging and coordinating their personal financial affairs to enable them to achieve their objectives. (There are several designations for financial planners, each differing in experience and training requirements.)

Financial planning Comprehensive strategy to integrate an individual’s or family’s financial goals, including risk management, investments, tax planning, retirement planning, and estate planning.

Financial risk Investing fundamental. It is the possibility that a security issuer will run into financial difficulties and not be able to meet obligations to investors.

Future value How much a sum of money invested today will be worth at a future date, with compounded interest. For instance, the future value of $10,000 ten years from now, with a 4.5 percent earnings rate, would be $15,529.

Futures Contracts to buy or sell a commodity on a specified day for a preset price. Similar to stocks, these contracts are traded on exchanges.

Inflation General increase in the cost of goods and services. Inflation is often measured by the consumer price index, which represents a fixed basket of goods such as food, utilities, transportation, and medical care.

Interest rate risk Risk that a rise in interest rates will cause the price of bonds to fall. In general, there is an inverse relationship between interest rates and bond prices so that when interest rates rise, bond prices fall and vice versa.

Liability A financial obligation, debt, or claim against a person or institution.

Liquidity Ability of an asset to be converted into cash quickly and without significant loss of value.

Loan fees Expense the lender charges the borrower. It can be a percentage of the loan amount (such as 1 percent of $125,000) or a flat dollar amount ($350 to process the loan request).

Market risk The risk that an overall decline in the stock market will have a negative impact on the securities you own. Although the companies in which you have invested may be doing well, if there is a general decline in stock prices your shares may decline in value anyway.

Monthly loan payments Payments made to the lender on a monthly basis calculated on the amortization or payback schedule.

Net income For an individual, gross income minus expenses.

Net worth Total assets minus total liabilities of an individual or company.

Opportunity cost Cost of goods and services that must be given up in order to obtain other goods and services.

Portfolio Individual’s or institution’s total investment holdings.

Preferred stock Class of stock that has preference for dividend payments over the common stock and, in many cases, for the liquidation of the company’s assets.

Prime rate Base interest rate that commercial banks charge on loans.

Recession Period of general and sustained economic decline.

Risk The measurable possibility of loss on an investment. There is risk involved if the outcome of an investment is uncertain at the time the investment is made. Although the outcome is uncertain, it is measurable.

Securities Instrument issued by a corporation or government that denotes a debt or ownership interest. Stocks and bonds are referred to as securities.

Speculation Accepting above-average investment risk in exchange for the opportunity to secure an above-average return.

Time horizon Length of time a sum of money is expected to be invested.

Treasuries Negotiable debt obligations issued by the U.S. government at various schedules and maturities. (See “Treasury bills,” “Treasury bonds,” “Treasury notes.”)

Treasury bills Short-term U.S. government securities with a maturity of one year or less.

Treasury bonds Long-term U.S. government securities with a maturity of more than seven years and pays interest semiannually.

Treasury notes Medium-term U.S. government securities with a maturity of one to ten years.

Yield Interest or dividend payable on a security, expressed as a percentage of the price of the security. Some investment advisers also include capital gain as part of the yield.