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Finance Flashcards

Principles of Finance

balance sheet A statement that reflects an individual’s or business’s financial position. It shows what is owned (assets) and what is owed (liabilities).
budget A detailed plan to manage the spending and saving of money.
deficit A financial shortage that occurs when liabilities exceed assets or when cash inflows are less than cash outflows.
discretionary expenses Any expenses that are not considered essential to the household or business. Examples include movie tickets, eating out, expensive clothes, and video games.
discretionary income Income that is available after all of the essential financial commitments have been paid
financial health A description of a person’s or an organization’s finances.
financial planner A professional who examines the assets of his or her clients and suggests steps to reach the client’s financial goals.
fixed expenses Expenses that remain the same regardless of the circumstances.
income Money that is received from any source, including the money one earns through labor, for services, from the sale of goods, allowance, disability, inheritance, and investments.
inflows Any incoming money; your income, tips, overtime pay, and any other sources of income that you may have.
insolvency A condition when someone’s liabilities are greater than his or her assets; the inability to pay debts when they are due.
outflows Outgoing expenses; anything that you spend money on.
SMART goal Goals that are specific, measurable, attainable, realistic, and time-bound.
SMART strategy A method used by individuals and even companies to help provide a framework for how a goal should be created.
surplus The money left over when income exceeds expenditure.
take-home pay Also called net pay; the amount that is left of your pay after deductions are made.
variable expense An expense that changes from period to period, such as food or gasoline costs
credit The act of buying something or borrowing money with the promise to repay the lender at a future date
devalue To reduce the value of something.
finance manager An individual who manages money and assets, either for an individual or for an organization.
financial analyst An employee of a bank, a brokerage, a financial advisor, or a mutual fund company who studies companies and makes buy and sell recommendations; the analyst often specializes in a single sector or industry.
financial planner An investment professional who helps individuals set and achieve their long-term financial goals through investments, tax planning, asset allocation, risk management, retirement planning, and estate planning. The role of a financial planner is to find ways to increase the client’s net worth and help the client accomplish all of his or her financial objectives.
inflation The declining value of money due to rising prices.
interest A fee paid for the use of money over time. In other words, it’s the cost of borrowing money. Interest is often expressed as a percentage of the amount borrowed.
investment An item that is purchased with the hope that it will generate income or increase in value in the future.
lender A person, or a public or private group, who makes funds available to another with the expectation that the funds will be repaid, plus any interest or fees.
stock A share of ownership in a company
taxonomy A categorized list of words related to a particular topic.
trade show An event at which goods and services in a specific industry are exhibited and demonstrated.
annual income The total amount of income an individual earns in a year from working, interest income, dividends, gifts, and so forth.
asset Any object of value, including cash, investments, property, and personal possessions.
cash flow The flow of money in and out of a business or a household over a period of time.
income Money that is received from any source, including the money one earns through labor, for services, from the sale of goods, allowance, disability, and inheritance investments.
liability An obligation that legally compels an individual to settle a debt—for example, a mortgage or an electric bill.
bank A depository institution where one can keep and borrow money and take care of financial affairs.
compound interest Interest earned on both the principal amount and any interest already earned.
credit union A cooperative nonprofit financial institution that is privately owned and controlled by its members. It provides depository and lending services to its members.
Federal Deposit Insurance Corporation (FDIC) An agency of the United States that promotes public confidence in the US financial system by insuring deposits in banks and thrift institutions for up to $250,000, by identifying, monitoring, and addressing risks to the deposit insurance funds, and by limiting the effect on the economy and the financial system when a bank or a thrift institution fails.
Federal Reserve The central bank of the United States. “The Fed” incorporates 12 Federal Reserve branch banks located in major cities across the nation, along with all national banks, all state-chartered commercial banks, and some trust companies. It helps to regulate the US monetary and banking system
finance The science of the management of money and other assets; the management of money, banking, investments, and credit.
financial advisor A professional who provides financial planning and advice on financial matters.
financial literacy The ability of individuals to make appropriate decisions in managing their personal finances
financial services industry Financial institutions that help consumers, businesses, and governments manage money. These institutions can be depository or not.
future value What an amount invested today at a particular interest rate will be worth in the future.
insurance company A financial institution that protects persons against the risk of financial loss.
interest A fee paid for the use of money over time. In other words, it’s the cost of borrowing money. Interest is often expressed as a percentage of the amount borrowed.
National Credit Union Administration (NCUA) An independent federal agency that serves to supervise and regulate federal credit unions. It also provides account insurance for many state-chartered credit unions through the National Credit Union Share Insurance Fund.
present value The value of a future cash stream discounted at the appropriate market interest rate.
risk Degree of uncertainty of return on an asset; the possibility of loss.
simple interest The amount of interest based on a principal amount and not on earned interest.
time value of money Money’s potential to grow in value over time; the relationship between time, money, a rate of return, and earnings growth.
annuity Investment in which the investor exchanges a sum of money for a series of equal payments over time. Payments can include interest on the original sum plus income from investments. Annuities contracts generally continue throughout the life of the owner. They are often purchased to provide retirement income and shift the responsibility for investing to an investment company.
bond A loan an investor makes to a government or corporation for a specified amount of time for the purpose of raising capital for the government or corporation. In return the investor receives the principal plus interest.
capital The financial resources that are used to make money, which can take the form of equity or debt.
financial intermediary An institution that acts as a service for those who have extra money to save or lend and channels it to those who wish to invest or borrow.
mutual funds Investment products that combine the money from a large group of investors to buy stocks and other investments.
pension funds Financial products that specialize in gathering payments into retirement funds and investing those payments so that they can accumulate to an amount that provides income at retirement.
savings and loans Depository financial institutions that specialize in home mortgage loans
stock A share of ownership in a company.
thrifts Depository institutions that include savings and loans, as well as savings banks. They specialize in saving accounts and real estate financing.
annual income The total amount of income an individual earns in a year from working, interest income, dividends, gifts, and so forth.
debt-to-income ratio The amount of debt a person or a household has in relation to their income. Lenders use this ratio to decide if more debt can be taken on by the borrower.
earned income Any money that is generated by working.
net worth or wealth A measure of the value of all of the net assets owned by a person, a community, a company, or a country. Net worth for a business or an individual is computed by subtracting personal liabilities from personal assets.
passive income Earnings received from rental property or other business activity where the individual is not actively involved (such as royalties from publishing a book).
portfolio income Income from investments, including dividends, interest, or the sale of a property.
account summary The section of a bank statement that provides a quick overview of account activity.
ATM (automated teller machine) An unattended computerized machine that dispenses money when a personal coded card is used.
automatic payment An arrangement that authorizes a set payment to be automatically withdrawn from a checking or savings account on a specified day.
balance The remaining amount in a customer’s account that represents the amount the customer is able to withdraw.
bank statement An account summary of all financial transactions occurring over a given period of time on an account offered by a financial institution.
certificate of deposit (CD) Record of money deposited in a financial institution for a stated time period at a fixed interest rate.
checkbook A book containing blank checks to be used by the holder of a bank account.
checking account A bank account in which the account holder can withdraw his or her available funds by writing a check.
check register A booklet used to track and balance checking accounts.
credit In banking, money received in an account that results in increasing the account balance.
debit In banking, money paid from an account that results in decreasing the account balance.
direct deposit A method of payment that is electronically deposited into an individual’s account.
electronic banking A service provided by financial institutions that allows customers to manage their banking transactions through computerized network services.
Individual Retirement Account (IRA) A tax-deferred account that allows individuals to plan for their retirement.
money market account A type of savings account that offers higher interest rates, with higher minimum deposit levels than a regular savings account.
reconciliation The process of comparing two sets of records and getting them to correspond.
savings account An account where you receive interest on your deposits, but unlike a checking account that also earns interest, it may have some restrictions.
secured loan A loan that is backed by collateral such as cars, houses, or other assets.
unsecured loan A loan that is not backed by collateral but by the promise of the borrower to repay it.
withdrawal The act of taking money out of an account.
annual fee The once-a-year fee applied to some credit cards.
annual percentage rate The yearly interest charge applied to outstanding credit card balances. It is one part of the cost of credit. It refers to the way the interest is compounded rather than to the stated interest rate.
average daily balance The sum of your balance each day in the billing cycle divided by total number of days in the billing cycle.
bankruptcy A legal action in which an individual (or an organization) is unable to repay debts and therefore must surrender his or her assets to creditors or establish a repayment plan.
bond A loan an investor makes to a government or corporation for a specified amount of time for the purpose of raising capital for the government or corporation. In return the investor receives the principal plus fixed-interest payments periodically for a period of more than one year.
credit The act of buying something or borrowing money with the promise to repay the lender at a future date. In banking, the term also refers to money received in an account that results in increasing the account balance.
credit bureau A credit-reporting agency that checks credit information and keeps files on people who apply for and use credit.
credit card A plastic card with a magnetic strip connected to an account that is used to buy goods or services. Credit cards give borrowers the ability to pay balances over time by applying an interest rate to unpaid balances.
credit rating An assessment of the creditworthiness of an individual. Financial institutions use this rating to evaluate whether a person should be eligible to receive credit.
credit report A record of an individual’s or company’s bill-paying behaviors.
creditor A person or a business to which debt is owed.
debtor A person or a business that owes money or services to a creditor.
debt-to-income ratio The amount of debt a person or a household has in relation to their income. Lenders use this ratio to decide if more debt can be taken on by the borrower. A person’s debt-to-income ratio is determined by dividing his or her total monthly debts by their gross monthly income.
default The failure of a borrower to repay the loan.
FICO Fair Isaac Corporation, founded in 1956 by Bill Fair and Earl Isaac. The most common credit-scoring model used by lenders. A FICO score can range from 200-900.
finance charge A fee representing the cost of credit. It covers the total cost of credit, including but not limited to interest rates, service fees, late fees, application fees, and appraisal fees.
fixed rate An interest rate that doesn’t change.
grace period The period before interest begins to accrue on new purchases. If the balance owed is paid in full, no interest is computed.
interest A fee paid for the use of money over time. In other words, it’s the cost of borrowing money. Interest is often expressed as a percentage of the amount borrowed.
interest rate The cost for borrowing money, expressed as a percentage.
introductory rate A temporary interest rate, frequently called a “teaser rate,” that is offered by the credit card company. Introductory rates are designed to entice borrowers to apply for a specific credit card and often have strict rules that, if violated, cause the rate to adjust to a much higher percentage.
late fee A fee charged when a payment is not received on time.
line of credit A preapproved amount of credit given to an individual or a business.
minimum payment The smallest amount a borrower can pay in a billing cycle to keep the account in good standing.
mortgage A loan used to purchase a home. The property is used as security.
over-the-limit fee A fee charged to credit borrowers who exceed their credit limit.
personal installment loan A type of loan that has a set number of payments and is repaid with interest over a specific period of time.
student loan A type of loan that is used by a student to pay for educational costs.
syndicated loan A large loan in which a group of banks provide funds for a borrower. Syndicated loans are typically used by corporations or even governments and may involve a fixed amount or a line of credit.
variable rate An interest rate that goes up or down depending on the market rate.
annuity Investment in which the investor exchanges a sum of money for a series of equal payments over time. Payments can include interest on the original sum plus income from investments. Annuities contracts generally continue throughout the life of the owner. They are often purchased to provide retirement income and shift the responsibility for investing to an investment company.
blue chip stock The stock of a financially sound company with a history of strong earnings and reliable dividends.
bond A loan an investor makes to a government or corporation for a specified amount of time for the purpose of raising capital for the government or corporation. In return the investor receives the principal plus fixed-interest payments periodically for a period of more than one year.
business risk The level of uncertainty of expected returns due to a business’s poor performance, adverse economic conditions, or other external factors.
capital markets The market for intermediate and long-term investments.
common stock A security representing a share of ownership in a company. Securities representing part ownership in a corporation, providing voting rights and entitling the holder to a share of the company’s success through dividends and/or capital appreciation.
corporate bonds Bonds issued by corporations that typically pay higher interest than government bonds.
debenture bond An unsecured, interest-bearing bond issued by a company or governmental agency.
derivatives Financial instruments whose value depends on the value of something else, such as an asset or an index.
diversification The process of spreading investments across a wide range of securities to reduce risk.
economic risk The investment risk associated with the overall health of the economy.
exchange-traded fund (ETF) A collection of stocks, bonds, or other investment instruments that trade on a stock exchange
financial market A system that allows people to easily buy and sell financial securities. There is a variety of different financial markets.
future A contract that requires the buyer to purchase or sell a certain instrument at a specific time and price in the future.
global investment risk The risk associated with investing internationally. Currency risk, political risk, different taxation laws, and regulatory differences are all a part of global investment risk.
hedge fund A private investment fund that is lightly regulated and uses leverage to invest in many markets
inflation risk The general rise in prices of goods and services in an economy that results in a decline in the real value of money or a loss of purchasing power. The declining value of money due to rising prices.
interest rate risk The changes in the market value of a fixed-income security due to changes in market rates of interest. The risk that interest rates will change.
junk bond A high-risk, high-yield bond of low credit quality.
liquidity risk The ease with which an investment can be bought and sold and/or converted to cash.
market index A method for measuring a particular sector of the stock market; it is used as a benchmark to gauge the performance of a specific investment.
market risk The risk that the value of an investment will decrease due to changes in the market. Stock prices, interest rates, exchange rates, and commodity prices as well as other outside forces can affect market risk.
money market The financial market for short-term borrowing and lending.
municipal bond A bond issued by the state or local government. Municipal bonds have the unique benefit of their interest being exempt from federal taxation.
mutual funds A bond issued by the state or local government. Municipal bonds have the unique benefit of their interest being exempt from federal taxation.
NASDAQ NASDAQ is an acronym for the National Association of Securities Dealers Automated Quotations. NASDAQ was founded in 1971 and is the largest electronic stock exchange in the United States. Unlike the NYSE, it has no physical location and exists entirely in cyberspace.
New York Stock Exchange (NYSE) The NYSE was founded in 1792 and is the oldest and largest securities market in the United States. It is located on Wall Street in New York.
NYSE Amex Equities (formally known as AMEX) An American stock exchange located in New York. Its core business revolves around small to mid-size stocks, options, and ETFs. It has a reputation for holding the most liberal policies concerning company listings.
option A derivative contract that gives the investor the right, but not the obligation, to buy or sell a specific item (commodity, currency, security, etc.) at a fixed price on a specific date.
preferred stock A security representing partial ownership of the company. It is capital stock that provides a specific dividend that is paid before any dividends are paid to common stockholders and that takes precedence over common stock. Like common stock, preferred stocks represent partial ownership in a company, although preferred stock shareholders cannot vote.
primary market A market relating to the first sale of new securities.
private equity Ownership of securities of companies that are not openly traded on stock exchanges; very wealthy investors are often interested in private equity investments.
REIT (real estate investment trust) An investment instrument similar to a mutual fund where investors pool their money to invest in real estate and/or mortgage loans.
risk tolerance A measure of an investor’s ability to cope with fluctuations in the value of their portfolio.
secondary market The market where previously issued securities are bought and sold. Stock exchanges such as the NYSE serve as secondary markets.
Series EE savings bonds Bonds offered by the federal government as an alternative to regular savings accounts. They can be purchased in amounts that range from $25 to $5,000. Series EE savings bonds earn interest for up to 30 years.
stock A security that represents partial ownership in a company.
Treasury bill (T-bill) Short-term US government security with a maturity date of one year or less. No interest is paid, but the debt is sold at less than the value and then repaid for full value at maturity.
Treasury bond A debt security of the US Treasury that is issued with a maturity length of 10 years or more. Treasury bonds are normally sold in $1,000 denominations.
zero-coupon bonds Municipal, corporate, or Treasury bonds that pay no annual interest over the life of the bond, are offered at a deep discount to par value, and are redeemed at full value upon maturity. The investor’s return on investment comes when redeeming the bond at its face value. Also called zeros or deep-discount bonds.

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