Personal Financial Literacy, 4th Edition Glossary

12b-1 fee

A mutual fund fee used to pay brokers for steering clients to the fund.

401(k)/403(b)

Allow employees to make contributions into a retirement account that may feature a range of investment options.

403(b) plan

A defined-contribution plan available to employees of nonprofit organizations.

accreditation

Official recognition that a school or program meets a certain standard.

adjustable rate mortgage

The rate may go up or down over time.

adjusted gross income

Income calculated by taking total income and subtracting allowable amounts including contributions to certain retirement accounts, alimony payments, interest paid on student loans, and other expenditures identified by the IRS.

annual percentage rate

The rate that factors in all the financing costs so that borrowers know exactly what they are paying and can make informed decisions.

annual percentage yield (APY)

The interest rate that takes the compounding frequency into account.

annuities

A type of financial product that guarantees annual payments to the owner for a fixed period of time or for a person's lifetime.

annuity

A series of equal cash flows occurring at equal intervals for a fixed period of time.

apprenticeship

On-the-job training program where you acquire skills while you are working.

asset allocation

The process of spreading your investments among asset classes to diversify your investments.

asset class

A specific type of investment such as bluechip stocks or municipal bonds.

assets

Anything owned, such as cars, motorcycles, and homes.

baby boom

A period of very high birthrates after World War II that occurred between 1946 and 1964.

balance sheet

Indicates the firm's sources of funds and how those funds were invested.

bank drafts

Occur when you authorize someone to take money out of your bank account automatically to satisfy some financial obligation.

bankruptcy

A legal process in which a court takes over some of the finances of a person who is unable to pay his or her bills.

beneficiaries

Your designated heirs.

benefits

Any perk or additional compensation someone receives for doing a job.

bonds

Certificates that function like IOUs—promises to repay a certain amount of money at some future time.

brokerage

A firm that provides investors access to the stock markets.

budget

A forecast of future cash inflows and outflows.

budgeting

The process of forecasting future expenses and income.

business cycle

Alternating periods of shrinking and growth, or expansion, in the economy.

business incubator

Special programs designed to help business start-ups innovate and grow their business.

business organization

An entity created to provide goods and/or services to make a profit.

call feature

A bond feature that gives the bond issuer the option of buying back the bond from investors at some point.

call risk

(also called prepayment risk) The risk that a bond will be called.

capital

Economic capital; includes all tools, buildings, equipment, machinery, or other non-land input used to produce output.

capital gains

A taxable gain that occurs when you sell an asset for more than what you paid for it.

cash advances

Using your card to get cash rather than just purchasing.

cash inflow

Money received from various sources.

cash outflow

Money paid out or spent.

cashier's check

A type of check written to a specific payee but charged against the bank instead of your account.

certificate of deposit (CD)

A contract between an individual and the financial institution that specifies the length of time that the individual will leave a certain amount of money deposited in the account and the interest rate earned.

certification

Official document or record stating that a person has met some standard for training or knowledge.

certified checks

Checks written on your account that have been verified by the bank.

check

A written order from you to your bank instructing it to pay money from your account to another party.

checking account

An account into which you deposit money and from which you gradually withdraw money by writing checks or using a debit card.

check register

A small ledger the bank will provide you for keeping track of your account balance.

closed-end mutual fund

A mutual fund that issues a fixed number of shares and does not sell new shares or redeem shares from investors.

co-insurance

The share of costs for covered insurance services that the insured person is required to pay out of his or her pocket.

co-pay

The share of costs for covered insurance services that the insured person is required to pay out of their own pocket.

collateral

An asset pledged as security for repayment of a loan.

collateralized loan

A loan that has some asset or collateral pledged against the loan so that the lender is assured of ending up with some valuable asset if the borrower fails to pay off the loan.

commission

A fee for carrying out a transaction.

compensation

What a job will pay you.

complementary goods

Products that are consumed together.

compound interest

Refers to the way that interest added to an account earns interest.

compounding

Earning interest on the principal and the interest earned in the past.

Consolidated Omnibus Budget Reconciliation Act (COBRA)

Allows you to continue health insurance coverage for up to 18 months after your employment ends.

consumer price index (CPI)

The formal measure of inflation that tells whether things overall are more expensive now than in the past.

convertible bond

A bond with a convertible feature.

convertible feature

A bond feature that gives shareholders the option of converting the bond to a fixed number of shares of common stock.

corporate bonds

Long-term debt securities issued by large firms.

corporation

A separate legal entity, which means your personal assets and your company assets are separated.

corporate social responsibility (CSR)

A company focus that incorporates social and environmental concerns into their daily operations.

cosigner

Someone other than the borrower who agrees to sign the loan document and repay the loan if the original borrower stops making payments.

coupon payments

Regular interest payments on a bond.

cover letter

A letter of introduction to a prospective employer.

credit

Money that a lender makes available to a borrower with the understanding that the borrower will repay the money in the future.

credit bureaus

Organizations that collect credit information about individual consumers.

credit cards

Provide individuals with revolving open-end credit, which can be drawn from repeatedly up to some preset limit.

credit check

When a potential creditor accesses your credit report to examine your credit history and determine your ability to repay.

credit history

A person's record of using credit.

credit provider

Financial institutions, such as banks, that agree to make a certain amount of credit available.

credit report

Summarizes an individual's existing and past credit history, including applications for credit of any kind, payment record for bills, whether you have paid late fees, and any other public information.

credit score

A numeric score that uses your credit history to assess your creditworthiness.

credit union

Functions similarly to a bank but has nonprofit status and is owned by its members.

current liabilities

Debts that must be paid off within 1 year.

cyclical unemployment

Unemployment due to the recession phase of the business cycle.

debit card

Enables you to withdraw cash from your account at ATMs, or to pay directly for goods or services at many stores and restaurants.

debt consolidation

Combining several small accounts into one larger account that you may be able to finance at a lower rate at a bank or with another lender.

deductible

The amount of money a policyholder pays prior to the insurance company's payment.

default risk

The potential for financial loss due to the chance of a borrower not making payments or defaulting on a loan.

defined-benefit plans

Guarantee you a specific amount of income when you retire.

defined-contribution plans

The employer contributes to the employee's retirement account but does not guarantee a specific retirement benefit.

deflation

A sustained decrease in the general level of prices.

demand deposit

Money put into a checking account that can be withdrawn at any time.

demographics

The study of human populations.

depository institutions

Financial institutions that provide traditional checking and savings accounts for individuals and businesses. They also provide loans.

depression

A severe recession.

diminishing marginal returns

A decrease in marginal output associated with an increase in some input.

discount brokerage

A brokerage firm that offers a reduced level of service at a lower cost that allows you to make your own trades.

discount

The difference between a fund's price and the fund's NAV when the price is less than NAV.

diversification

The practice of buying several different assets to reduce the risk of loss.

dividends

Cash distributed to company shareholders.

down payment

Upfront money from the buyer that is used to pay for a portion of the house.

economics

The study of choices. Common economic topics include production, consumption, wealth transfers, economic growth, unemployment, and other topics.

economy

The system in which individuals, businesses, governments, and the world as a whole interact.

electronic funds transfer

Whenever you authorize someone to access your bank account for payment or for deposit.

Employee Stock Ownership plan (ESOP)

A retirement plan where the employer contributes some of its own stock to the employee's retirement account.

employer-sponsored retirement plans

Set up by the employer, and the employer will generally make some contributions to the plan on your behalf.

entrepreneurship

The process of starting a business.

entrepreneur

People who start their own business.

equilibrium

The level of output where the quantity supplied exactly equals the quantity demanded.

equity

The amount of a specific asset that we own after subtracting any liabilities.

estate planning

The process of determining how your wealth will be allocated on or before your death.

expense

Anything on which we spend money.