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A glossary of select financial terms.
- Annual Percentage Rate (APR)
- A term used to present the percentage relationship of the total finance charge to the amount of the loan. The APR reflects the cost of the mortgage loan as a yearly rate. It could be higher than the interest rate stated on the Note because it includes, in addition to the interest rate, loan discount points, miscellaneous fees and mortgage insurance.
- Annual Percentage Yield (APY)
- The percentage rate reflecting the total interest to be earned based on the interest rate and an institution’s compounding method, assuming funds remain in the account for a 365-day year.
- Annuity (Fixed)
- An annuity is a contract under which a series of payments are promised to a person in exchange for a single payment or series of payments.
Deferred Annuity—Allows a person to accumulate money over time on a tax-deferred basis, and then allows a choice of several payout options.
Immediate Annuity—Allows a person to convert a sum of money into a guaranteed series of payments for a period equal to the greater of the person's life or a certain number of years.
- Assets
- Any item of economic value owned by a person or entity. Examples are cash, securities, accounts receivable, inventory, office equipment, a house, a car, and other property. On a balance sheet, assets are equal to the sum of liabilities and owner’s equity.
- Asset Class
- A type of investment, such as stocks, bonds, real estate or cash.
- Balanced Investment Strategy
- A method of portfolio allocation designed to provide both income and capital appreciation while avoiding excessive risk.
- Beneficiary
- An individual, institution, trustee or estate which receives, or may become eligible to receive, benefits under a will, insurance policy, retirement plan, annuity, trust or other contract upon the death of a certain person.
- Bonds
- Debt obligation that is issued by a government or business firm with a term that usually exceeds five years. Generally, a bond is a promise to repay the principal along with interest on a specified date(s). It is often secured and has priority over shareholders if the company becomes insolvent and its assets are distributed.
- Compound Interest
- Interest that is determined by adding the interest earned in the current period to the principal and computing the next period's interest on this "compounded" total amount.
- Custodial Account
- An account which is administered by one person or entity (the custodian) for the benefit of another person, usually at a bank, mutual fund or brokerage.
- Debt Financing
- Financing by selling bonds, bills or notes to individuals or institutions.
- Diversification
- A portfolio strategy designed to reduce exposure to risk by combining a variety of investments, such as stocks, bonds and real estate, which are unlikely to all have the same volatility. The goal of diversification is to reduce the risk in a portfolio. Volatility is typically limited by the fact that not all asset classes or industries or individual companies move up and down in value at the same time or at the same rate. Diversification helps reduce both the upside and downside potential and allows for more consistent performance under a wide range of economic conditions.
- Equity Financing
- Financing by selling ownership interests to investors.
- Estate
- A person’s assets and liabilities.
- Estate Planning
- The preparation of a plan of administration and disposition of one's estate using a will, trusts, gifts, power of attorney, etc.
- Homeowners Insurance
- Property insurance policy providing coverage for loss or damage to a home, usually a single-family dwelling. Coverage is also provided for loss or damage to the insured's personal property—furnishings, clothing, other goods, for example—and for personal liability arising from bodily injury or property damage to another person. Homeowners insurance is required by most mortgage lenders.
- Inflation
- The overall general upward price movement of goods and services in an economy, usually as measured by the Consumer Price Index and the Producer Price Index. Over time, as the cost of goods and services increase, the value of a dollar falls because a person won't be able to purchase as much with that dollar as he or she previously could.
- Liability
- A legal obligation, debt, claim or potential loss.
- Liquid
- Easily convertible to cash.
- Life Insurance
- Insurance providing for the payment of a stipulated amount to a designated beneficiary upon the death of the insured.
- Mutual Fund
- A mutual fund brings together money from many people and invests it in stocks, bonds or other assets. The combined holdings of stocks, bonds or other assets the fund owns are known as its portfolio. Each investor in the fund owns shares, which represent a part of these holdings.
- Net Worth
- Total assets minus total liabilities of a person or entity.
- Pension
- Post-retirement benefits that an employee receives from his/her employer’s retirement plan.
- Permanent Life Insurance
- Life insurance that provides continuing coverage for the insured’s entire life, rather than for a set number of years. Permanent life insurance may accrue values that the owner can withdraw or use to increase the death benefit.
- Person
- As used in this glossary, person means a natural person (a human being) or a legal entity such as a corporation, partnership, trust, etc.
- Portfolio
- A collection of investments all owned by the same individual or organization. These investments often include stocks, bonds and mutual funds.
- Principal (Amount)
- The amount borrowed, or the part of the amount borrowed which remains unpaid (excluding interest). Also considered the original amount invested or deposited.
- Rate of Return
- The annual rate of return on an investment, calculated as a percentage of the total amount invested.
- Renters Insurance
- Property insurance providing coverage to an individual living in a rented dwelling, apartment, or other location owned by someone else. Coverage is provided for loss or damage to the insured's personal property—furnishings, clothing, and other goods, for example—and for personal liability arising from bodily injury or property damage to another person.
- Registered Education Savings Plan
- A plan that enables a contributor, on a tax deferral basis, to accumulate assets on behalf of a beneficiary to pay for a post secondary education.
- Registered Retirement Savings Plan
- retirement savings plan to hold amounts deducted from taxable income, within certain limits, in a tax deferred state. There are various investment options and a tax deferral on investment income and gains. Available to individuals to and including 69 years of age, but must be collapsed by the end of the year in which the holder turns 69 years of age.
- Stock
- A security that signifies an ownership interest (called equity) in a corporation, and represents a claim on its proportional share in the corporation's dividends and net assets. In a corporation with a single class of stock, ownership in the company is determined by the number of shares a person owns divided by the total number of shares outstanding. For example, if a company has 1000 shares of stock outstanding and a person owns 50 of them, then he or she owns 5% of the company.
- Tax-deferred
- Deferral of taxes on income until a later date. Examples of tax vehicles include IRA, 401(k), Keogh Plan, annuity and employee stock ownership plan.
- Term Life Insurance
- Life insurance that provides coverage for a fixed number of years. Unlike permanent life insurance, a term life insurance policy does not usually accrue additional values that the owner can withdraw or that can increase the death benefit.
- Trust
- A means for one person, called the trustee, to own and control property for the benefit of him/herself or for another person, called the beneficiary.
Living Trust—Established during the lifetime of the person who created it.
Testamentary Trust—Created by a person’s will and therefore comes into existence after a person’s death.
- Will
- A legally enforceable declaration directing the disposal of a decedent's probate property.