Personal Finance Terms

convertible bond

bond that can be exchanged for determined number of shares of issuing company’s stock

callable bond

issuer has the right to redeem/buy back before its maturity date

adjustable-rate mortgage

• A mortgage that permits the lender to periodically adjust the interest rate on the basis of changes in a specified index.

adjusted gross income

• Gross income minus specific adjustments.

Annual percentage rate (APR)

• The percentage cost of credit on an annual basis and the total cost of credit to the consumer. APR combines the interest paid over the life of the loan and all fees that are paid up front.

annuity

• A series of fixed payments of the same amount paid at regular intervals (i.e., every week, month, or pay period) over a specified period of time.

Arbitrage

• The simultaneous purchase and sale of funds (or goods) in order to profit from a difference in price.

Board of Governors

• A federal government agency that is the centralized component of the Federal Reserve System. These governors guide the policy actions of the Federal Reserve System.

Bond yield

• The average return from owning a bond. It depends on the price paid for the bond, itsoupon payments, and time to maturity.

Capital ratio (banking system)

• Total assets minus total liabilities as a percentage of total assets.

Cash flow

• Income (dollars coming in, usually from working) minus expenses (dollars going out, usually to buy goods and services).

Chapter 11 bankruptcy protection

• The chapter of the Bankruptcy Code providing (generally) for reorganization, usually involving a corporation or partnership. A Chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time. Business owners and individuals can also seek relief in Chapter 11.

Chapter 7

• A type of bankruptcy that requires individuals unable to pay their debts to sell his or her assets to pay creditors. Also known as “liquidation” or “straight” bankruptcy.

3 C’s of credit

character, collateral, capacity

Clearing banks

• Financial institutions that clear trades in government securities, agency securities, and other money market instruments for non-bank dealers.

Coase theorem

• Coase theorem says that externalities can be resolved efficiently if the parties can negotiate with low bargaining costs and that the result does not depend on who has property rights.

Collision insurance

• Vehicle insurance that provides coverage for repair or replacement when damage is due to an accident with another vehicle or object.

Commercial paper

• A short-term, unsecured promissory note issued by an industrial or commercial firm, a financial company, or a foreign government. Typically, maturity is 90 to 180 days.

Common stock

• A share of ownership of public corporations; stockholders may vote on matters affecting the company.

Comprehensive insurance

• Vehicle insurance that provides coverage for theft or damage that is not from a collision.

Co-payment (co-pay)

• A set dollar amount the customer pays, with the insurance company paying the difference.

Coupon payment

• The monthly or annual interest payment that the bondholder receives from the bond's issue date until the bond matures.

Credit rating agencies

• Firms that rate the quality of bonds and other financial securities. These ratings are used by investors to assess the probability of default. Well-known rating agencies include Moody’s, Standard & Poor’s, and Fitch Ratings. Firms in this business must meet standards enforced by the Securities and Exchange Commission.

Deductible

• An amount you must pay for expenses before the insurance company pays. The deductible amount is specified by the terms of the insurance policy.

Default

• Default is the failure to promptly pay interest or principal when due.

Delinquent

• Failing to make timely payments under a loan or other credit agreement.

Delinquency rate

• In general, the delinquency rate refers to a percentage determined by dividing the number of loans that have delinquent payments by the number of total loans.

Discount rate

• The interest rate charged by the Federal Reserve to banks for loans obtained through the Fed's discount window.

Discount window

• Federal Reserve lending to depository institutions to support the liquidity and stability of the banking system and the effective implementation of monetary policy.

Efficient market hypothesis (EMH)

• The theory that the current price of a stock in a corporation reflects all relevant information about the stock’s current and future earnings prospects.

FICO credit score

• The most widely used credit score. FICO stands for Fair Isaac Corp., the company that developed this system of credit evaluation. FICO scores vary but generally range between 500 and 850. The higher the score, the more likely a borrower is to repay loans/debts.

Fannie Mae (Federal National Mortgage Association)

• Public-private enterprise established as a federal agency in 1938 and chartered by Congress as a private company in 1968. Its mission is to provide liquidity and stability to the U.S. housing and mortgage markets by bundling mortgage loans into tradable securities.

Federal Home Loan Banks

• A system of 12 regional banks with a primary mission to meet credit and financial service needs of local communities. Chartered by Congress in 1932 to promote a healthy mortgage finance system. Home loan banks are privately owned, wholesale banks without publicly traded stock.

Federal Insurance Contributions Act (FICA) tax

• A tax or required contribution that most workers and employers pay. FICA is a payroll tax used to fund Social Security and Medicare.

Federal Open Market Committee (FOMC)

• A Committee created by law that consists of the seven members of the Board of Governors; the president of the Federal Reserve Bank of New York; and, on a rotating basis, the presidents of four other Reserve Banks. Nonvoting Reserve Bank presidents also participate in Committee deliberations and discussion.

Forbearance

• The temporary suspension or reduction of monthly loan payments, usually up to one year.

Foreclosure

• The legal process by which a property that is mortgaged as security for a loan may be sold and the proceeds of the sale applied to the mortgage debt. A foreclosure can occur when the loan becomes delinquent because payments have not been made or when the borrower is in default for a reason other than the failure to make timely mortgage payments.

Form 1040

• The standard Internal Revenue Service (IRS) form that taxpayers use to file their annual income tax returns.

Gini coefficient

• A statistical measure of income inequality that ranges from 0 to 1. A Gini coefficient of 1 indicates perfect income inequality, where one person earns all the income and the rest of the population earns none. Conversely, a Gini coefficient of 0 indicates that total income is equally distributed among the entire population. A Gini coefficient, at a particular point in time, can be calculated graphically by finding the area between the line representing a country's income distribution (known as the Lorenz curve) and a line of perfect income equality.

Government-sponsored enterprises (GSEs)

• Enterprises that were established and chartered by the federal government for public policy purposes. GSEs include the Federal Home Loan Banks, the Agricultural Credit Bank and Farm Credit Banks, and the Federal Agricultural Mortgage Corporation. With the exception of Fannie Mae and Freddie Mac, which were taken into conservatorship by the federal government on September 7, 2008, GSEs are private companies and their securities are not backed by the full faith and credit of the federal government.

Home Owners Equity Protection Act (HOEPA)

• A 1994 amendment to HMDA that provides certain protections to mortgage borrowers. These include protecting consumers from unfair, abusive, or deceptive mortgage lending and servicing practices, ensuring that mortgage advertisements provide accurate and balanced information, and providing consumers with transaction-specific disclosures early enough to use while shopping for a mortgage.

IRA (individual retirement account)

• A retirement account that allows individuals to direct pretax or after-tax income, up to specific annual limits, toward investments that can grow.

Jumbo loan

• A loan that exceeds the mortgage amount eligible for purchase by Fannie Mae or Freddie Mac. Also called a "nonconforming loan".

LIBOR index

• An index used to determine interest rate changes for certain ARM plans, based on the average interest rate at which international banks lend to or borrow funds in the London interbank market.

Liar loan

• An industry term for a low- or no-documentation loan, typically Alt-A or subprime, where there is a suspicion the borrower, mortgage broker, or loan officer may have fraudulently overstated the income and/or assets to qualify for a larger loan. These loans are typically "stated income" or "stated asset" loans, where the lender does not verify the income and instead records income based on the borrower's verbal statement.

Lien

• The legal right to take or sell property as security for a debt.

Monoline bond insurers

• A financial guaranty (insurance) company that guarantees all scheduled interest and principal payments on the bonds it insures and writes no other line of insurance.

NASDAQ

• The National Association of Securities Dealers Automated Quotations system—a stock exchange where trades are made electronically.

Negative amortization

• An increase in the balance of a loan caused by adding unpaid interest to the loan balance; this occurs when the payment does not cover the interest due.

Option

• A contract to buy or sell a specific financial product known as the underlying instrument at a pre-specified price.

Overdraft

• The result of an account holder authorizing a withdrawal through a check, ATM withdrawal, debit card purchase, or electronic payment when the account does not have enough money to cover the transaction.

Preferred stock (equity)

• Equity (ownership) shares in a firm that have a senior claim over common shareholders on the assets of a firm in the event of bankruptcy. A firm must pay preferred dividends on these shares, according to a contractually specified schedule at a rate that is either fixed or floating, before it can pay dividends to common shareholders.

Quantitative easing (QE)

• A monetary policy in which a central bank makes large-scale asset purchases designed to bolster financial market conditions.

Securitization

• A financial transaction in which assets such as mortgage loans are pooled and securities representing interests in the pool are issued.

Short selling

• The selling of a stock or other security not owned by the seller. In effect, the seller is betting that the price of the security will fall. A "naked" short sale is an unhedged position.

Tranche

• When mortgages are securitized, the bonds created are often divided into a number of tranches. Tranches are related bonds offered as part of the same transaction, where each bond is a different slice of the deal's risk. Transaction documentation defines the tranches as different "classes" of notes, each identified by letter (e.g., Class A, Class B, and Class C securities). Bonds in the least-risky class have first claim on the cash flow from the pool of underlying mortgages, then bonds in the next class are paid, and so on, up to the riskiest bonds, which have the residual claim. Bonds in riskier tranches typically pay higher interest.

W-2 form, Wage and Tax Statement

• A summary of a person's earnings and tax withholdings for an entire year. Employers must provide a W-2 to employees by the end of January for the previous year's employment to report annual income and withholding on the employees' tax returns.

W-4 form, Employee's Withholding Allowance Certificate

• A form completed by the employee and used by the employer to determine the amount of income tax to withhold.

• done by employee

money market account

deposit account, accumalates interest, FDIC insured

money market fund

investment vehicle, not FDIC insured

prospectus

issued by the SEC for information on securities offered to the public

529 plan

like 401k I think but can go tax-free for education expenses

put option

if predict that stock price will go down, buy smth so that even if go down u can still sell the security for its previous/higher price

call option

if predict that stock price will go up, can still purchase it for its lower price

limit order

when u won’t buy stock unless it’s sufficiently low

treasury bill, note, bond

<1 years, 2-10 years, 10-30 years bonds

comprehensive insurance

“act of god” insurance, fire or rain or storm

collision insurance

you run your car into something, hit pole/tree

liability coverage

pay for damages you cause

uninsured motorist coverage

if u are in accident with uninsured driver

insurance car accident 100|300|50

injury to another|total bodily injury|property damage

W-9 form

• provide their taxpayer identification number to entities that will pay them income during the tax year

• like freelance work

W-2 form

report wages paid to employees and taxes withheld by employers

done by employer

I-9 form

shows person’s identity and employment eligibility

above-the-line tax deductions

—> calculate adjusted gross income

HSA, interest on student loans, 401k, ira, etc.

mortgage interest only tax deductible if itemized

below-the-line deductions

—> calculate taxable income

standard deduction and itemized deductions (to do itemized, use form 1040 schedule a)

1099 form

report wages other than wages, salaries, and tips

• freelacers, contractors, consultants

• -MISC: company paid you for smth

• -INT: interest in accounts

• -DIV: dividends or distributions

• -G: certain gov payments, like unemployment or refund

• -C: cancellation of debt

1098 form

different types to reduce taxable income

-T: for tuition, educational money, like scholarships

: mortgage interest

-E: student loan interest

-C: contribute car, boat, plane to charity

1040 form

personal tax return form for gross income — includes W2, 1099, 1098, and other tax forms

tax credit vs tax deduction

reduces amount of taxes you owe vs decrease your taxable income

long-term care insurance

costs of long-term care, like nursing homes for elderly people

disability insurance

paycheck replacement to those who are unable to work because of a disability

life insurance

if person dies

whole life

lasts whole life, builds cash value over time

term life

for specific time period, cheaper

Earnings per share

net income/outstanding shares of common stock

Chapter 13

wage earner, repayment plan, stays on report for 7 years

chapter 12

farmers and fisherman bankruptcy

chapter 11

reorganization for businesses

chapter 15

foreign businesses

chapter 9

municipalities