ECO 102

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Time value of money

The idea that a dollar today is worth more than a dollar received in the future, because money today can be put to productive use and earn a return.

Opportunity cost

What you give up by choosing one option instead of another. For example, spending $100 today means giving up the return you could have earned by saving or investing it.

Interest

The price of using money over time. Borrowers pay interest to receive money sooner; savers and lenders earn interest for waiting to use their money

Interest rate

The amount of interest paid or earned, expressed as a percentage of the amount borrowed or saved.

Principal

Amount of money originally borrowed or invested

Prevent value (PV)

What an amount of money is worth today

Future Value (FV)

What an amount of money today will be worth at a future date after earning interest

Compounding

The process of earning interest on both the original principal and previously earned interest.

Simple interest

Interest calculated without earning interest on previously earned interest.

Compounding interest

Interest calculated on both the original principal and accumulated interest - often described as "interest on interest.

Compounding frequency

How often interest is calculated and added - for example, annually, monthly, or daily

Discounting

Working backward from a future amount of money to determine its value today - the reverse of compounding.

Discount rate

The interest rate used to translate a future amount of money into its present value.

Outstanding Principal

The portion of the original loan that you have not yet paid back.

Amortization

The process of gradually paying off a loan through regular payments. Each payment covers some interest and some principal

Amortizing loan

A loan in which regular payments gradually reduce the outstanding principal until the balance reaches zero. Mortgages and auto loans are common examples

Amortization schedule

A breakdown showing how each loan payment is divided between interest and principal and how the outstanding balance changes over time.

Inflation

An increase in the general level of prices over time, and reduces how much a given amount of money can buy

Purchasing power

The amount of goods and services that money can buy. When prices rise, the ____ of a dollar falls.

Consumer Price Index (CPI)

A measure of the price level based on the cost of a fixed basket of consumer goods and services. Changes in this are commonly used to measure inflation.

Nominal

Measured in actual dollars, w/o adjusting for inflation

Real

Adjusted for inflation, so that values reflect purchasing power

Nominal interest rate

Stated interest rate before accounting for inflation

Real interest rate

Interest rate after accounting for inflation. Captures how much additional purchasing power saving provides. Approximately equal to Nominal Interest Rate - Inflation Rate.

Consumption smoothing

Trying to keep consumption relatively stable over time, even when income rises and falls, using saving or borrowing.

Utility

An economics term for the value or satisfaction a person gets from consumption.

Marginal utility

The additional utility from one more unit of consumption. Declines as consumption rises.

Federal Reserve

The U.S. central bank. Its monetary policy decisions influence interest rates throughout the economy.

Federal Open Market Committee (FOMC)

The Federal Reserve committee that makes key monetary policy decisions, including setting the target range for the federal funds rate.

Federal Funds Rate

A very short-term interest rate associated with overnight lending between banks. Changes in this rate influence other borrowing and saving rates.

Liquidity

How easily money or an asset can be accessed or converted to cash.

Collateral

An asset that a lender can claim if a borrower does not repay a secured loan.

Maturity

The length of time until a loan, deposit, or other financial instrument comes due.

Term Structure of Interest Rates

The relationship between interest rates on otherwise similar investments or loans with different maturities.

Yield Curve

A graph showing interest rates across different maturities, such as short-term versus long-term Treasury rates

Inverted yield curve

A yield curve in which short-term interest rates are higher than longer-term rates

Expectations theory

The idea that long-term interest rates reflect current and expected future short-term interest rates.

Prime rate

A benchmark interest rate used by banks for some loans; floating-rate borrowing may be tied to it.

Fixed rate

An interest rate that stays the same for a specified period, such as the full term of a fixed-rate mortgage

Floating/variable rate

An interest rate that can change over time, often because it is tied to a short-term benchmark rate.

Savings vehicle

A financial product or account used to hold savings, such as a savings account, money market account, or certificate of deposit.

Certificate of Deposit

A deposit that generally pays a set interest rate in exchange for committing money for a specified period; early withdrawal may involve a penalty.

Money Market Account

An FDIC secured, interest-bearing deposit account offered by banks/credit unions that may require a higher minimum balance or limit transactions. It is different from a money market fund, which is not FDIC secured.

Money Market Fund

An investment fund that holds short-term securities. Unlike a bank money market deposit account, it is not covered by FDIC deposit insurance.

FDIC Insurance

Federal insurance that protects eligible deposits at FDIC-insured banks, subject to coverage limits.

Insured Deposit

Money held in an eligible deposit account that is protected by deposit insurance up to the applicable limit.

Liquidity of Savings

How quickly and easily savings can be withdrawn or used without a penalty or loss of value.

Debt

Money that a borrower owes to a lender

Credit

The ability to borrow money, or the lender's claim on money that has been lent.

Closed-End Credit

A one-time loan that is repaid over a specified period, usually through installment payments

Open-End Credit

Credit that can be borrowed, repaid, and borrowed again over time, such as a credit card.

Secured credit

Borrowing backed by an asset that the lender can seize if the borrower fails to repay (e.g. a car)

Unsecured credit

Borrowing that is not backed by a specific asset. Credit cards are a common example

Credit Limit

The maximum amount a lender allows a borrower to owe on an open-end credit account

Credit History

A record of a person's past borrowing and repayment activity.

Credit Bureau

A company that collects information about consumers' credit histories. Experian, TransUnion, and Equifax.

Credit Report

A record summarizing a person's credit history and accounts, used by lenders when evaluating applications for credit.

Credit Score

A numerical summary of information in a credit report, used to help lenders assess credit risk

FICO Score

A widely used credit score, (300-850 range)

Payment history

A record of whether bills and debts have been paid on time; an important input into credit scores.

Credit mix

The different types of credit accounts a person has, such as credit cards and installment loans.

Deep subprime, Subprime, Near-prime, Prime, Superprime

Borrower risk profiles (categories)

Delinquency

Failure to make a required debt payment on time

Income volatility

Month-to-month fluctuations in household income. Many households experience meaningful income spikes and dips.

Emergency fund

Liquid savings set aside for unexpected income losses or expenses. Should be enough to cover at least 3 months, ideally 6 months, of spending

Short term credit

Borrowing intended to cover a relatively short period, including credit cards, overdrafts, installment loans, and payday loans.

Finance charge

The dollar cost of credit, including interest and applicable fees.

Annual Percentage Rate (APR)

A standardized annual measure of the cost of borrowing as a percentage of the amount borrowed. It can incorporate applicable lender fees and helps compare loans with different terms

Effective Annual rate (EAR)

An annualized rate that accounts for compounding of a periodic borrowing rate

Annual Percentage Yield (APY)

An annual yield measure that accounts for compounding; commonly used for savings accounts and investments.

Truth in Lending Act (TILA)

Federal law requiring lenders to disclose key credit terms, including APR

Periodic Rate

The interest or finance-charge rate applying over a shorter period, such as a month or two weeks.

Payday loan

A short-term loan typically repaid on the borrower's next payday. Fees that look modest in dollars can translate into a very high APR.

Installment Loan

A loan repaid through a series of scheduled payments. Its true borrowing cost depends on the declining balance over the repayment period

Schumer Box

The standardized credit-card disclosure table showing interest rates and major fees

Variable APR

An APR that can change with a benchmark interest rate, such as the prime rate

Teaser Rate

A low introductory interest rate that rises after the introductory period ends

Penalty Rate

A higher interest rate that may apply after events such as late payments

Cash Advance

Cash borrowed using a credit card. It commonly carries a higher rate and begins accruing interest immediately.

Balance Transfer

Moving debt from one credit card to another, often with a special introductory APR and sometimes a transfer fee.

Annual fee

Yearly charge for holding a credit card

Minimum payment

The smallest required monthly credit-card payment. Paying only this amount can make debt repayment very slow.

Credit utilization

The share of available revolving credit currently being used. Higher utilization can negatively affect a credit score

Persistent credit card debt

When interest and fees exceed half of the actual payments made on an account during a calendar year.

Negative amortization

A situation in which required payments do not cover accrued interest, causing the amount owed to grow rather than shrink

Revolver

A credit-card user who carries an unpaid balance from month to month and therefore pays interest.

Transactor

A credit-card user who generally pays the statement balance in full and avoids interest charges.

Credit constraint

A restriction on desired borrowing, such as being denied credit, receiving a lower credit limit, or facing a higher borrowing cost

APR Margin

The card APR minus the prevailing prime rate

Interchange fee

The portion of a merchant's card-acceptance fee that is paid to the cardholder's issuing bank.

Merchant Discount Rate

The total fee a merchant pays to accept a card payment; interchange is a major component of it.

Acquiring bank

The merchant’s bank in a card transaction

Card network

The payment network that helps route and process card transactions between merchants and banks

Credit card rewards

Cash back, points, miles, or other benefits earned from card spending. Issuers typically fund rewards through interchange revenue.

Premium credit card

A rewards-rich credit card that tends to carry higher interchange fees than basic credit cards.

Durbin amendment

A U.S. policy that capped interchange fees on debit cards issued by large banks

Overdraft

A negative checking-account balance created when payments exceed the funds available in the account.

Overdraft Protection

An arrangement under which a bank allows transactions that overdraw an account, typically charging a fee and possibly interest

Cross-subsidy

A situation in which one group helps finance benefits received by another group; examples in card interest payments and merchant interchange fees.

Consumer sorting

The fact that users of different payment methods do not necessarily shop at the same merchants