Glossary Terms

An annual management fee charged to mutual fund shareholders and calculated as a percentage of the assets under management.

An employer-sponsored defined contribution plan. Contributions may be made by employer, employee, or both. The employee’s contributions are tax deferred until distribution after age 59.5 and are limited by the Internal Revenue Code.

Assets = liabilities + equity, or the value of assets must be equal to the value of the debt and equity that financed them. In personal finance, assets = debts + net worth, or net worth = assets − debts.

Personal liability insurance in attached to a homeowner’s policy.

Benefits and premium can be adjusted without cancellation of the policy.

An individual or group providing equity financing; usually a wealthy individual.

The strategy of achieving portfolio diversification by investing in different asset classes.

A kind of investment distinguished by its uses and market (e.g., stock, bonds, fine art, real estate, currency).

Resources that can be used to create future economic benefit, such as increasing income, decreasing expenses, or storing wealth as an investment.

Shares of common or preferred stock that have been authorized for issuance by a corporation’s board of directors.

A deferred sales charge or sales fee charged when shares are redeemed.

A list of all assets, liabilities, and equity or net worth, at a given point in time, providing a concise picture of financial condition at that time.

An economic situation when the value of debts is greater than the value of the assets that can be used to satisfy them. Formal bankruptcy is also a legal process aiming to compensate creditors, governed by the laws of the nation or state in which it occurs.

Health insurance that covers the costs of physician expenses, surgical expenses, and hospital expenses.

A system of auto insurance where the insured’s insurance covers physical and property damage and liability, regardless of “fault” determined.

Publicly issued and traded long-term debt used by corporations and governments.

A shortfall of available funds created when income is less than the expenses.

An excess of available funds created when income is greater than the expenses.

Recurring periods of economy-wide expansion, when the economy is growing, and contraction, when the economy is shrinking. Cycles are often measured by the increase or decrease in the GDP.

A feature of a lease that offers the option to buy the asset financed by the lease at the end of the lease term.

A bond that may be redeemed before maturity.

A strategy of diversifying a portfolio between risky and riskless assets.

Wealth created when an asset is sold for more than the original investment.

Wealth lost when an asset is sold for less than the original investment.

A market where long-term liquidity is traded.

The value of a whole life policy—the cash available for the policyholder—if the policy is canceled before the death of the insured.

A mutual fund that issues a limited number of shares, so that existing shares must be sold to new investors.

Partial payment for certain costs, made by the insured.

Shared payments by insured and insurer.

Responsibility for damage to property owned by people other than the driver at fault.

Raw materials—natural resources or agricultural products—used as inputs in processing goods and services.

Responsibility for damage to the property of the driver at fault.

A sales or excise tax that taxes the consumption of discretionary and nondiscretionary goods and services.

The cost of borrowing capital because of having to pay interest on the principal.

The cost of having to share the benefits—capital gains or income (dividends)—from the investment.

The interest payment on a bond, specified as a feature of the bond at issuance.

The interest rate offered on a bond.

A condition placed on bond issuers (borrowers) to protect bondholders (lenders).

A part of the capital market where capital is lent and borrowed through the trading of debt securities such as bonds.

Lenders; anyone to whom debt is owed.

Borrowed capital, a liability, a loan that must be repaid.

Costs paid by the insured before the insurer provides coverage.

A pension plan sponsored by an employer in which the employer commits to providing a specific amount of benefit based on wages and tenure to retired employees.

A pension plan sponsored by an employer in which the employer commits to providing a specific amount of contribution to a retirement account owned by an active employee.

Period characterized by falling prices, increasing purchasing power, and higher currency values (one unit of currency is worth more because it buys a greater quantity of goods and services).

A prolonged and severe recession.

Financial instruments such as options, futures, forwards, securitized assets, and so on whose value is derived from the value of another asset.

Insurance to protect the insured against the risk of being unable to earn wages or salary as a result of injury or illness.

The strategy of reducing risk by spreading income and investments among a number of different kinds, sources, and locations.

A share of corporate profit distributed to shareholders, usually as cash or corporate stock.

Valuable property insured separately under a homeowner’s policy.

An ownership share in an asset, entitling the holder to a share of the future gain (or loss) in asset value and of any future income (or loss) created.

A tax on the intergenerational transfer of wealth after death.

A fund that tracks an index or a commodity or a basket of assets but is traded like stocks on a stock exchange.

A mutual fund that is structured as a closed-end fund and actively traded on an exchange.

A tax on a specific item produced within a country.

The person named in a will who administers the payments of debts and the distribution of assets, as described in the will.

The return expected for an investment based on its average historical performance. Statistically, it is the mean or average of the investment’s past performance.

The costs of consumption or daily living.

The full cost of replacing insured items at time of loss.

For a bond, the amount to be repaid to the bondholder upon redemption.

The use of mathematical modeling to create and value new financial instruments and markets.

A bond interest rate that does not change over time, from issuance to maturity.

An account created with regular payroll deductions by an employee to finance supplemental health care costs. Monies must be expended within a specified time period or forfeited (“use it or lose it”).

A bond interest rate that changes over time, usually related to a benchmark rate such as the U.S. discount rate or prime rate.

A list of drugs covered by an insurer under a prescription drug plan.

A private contract to buy or sell an asset at a specified time and price in the future.

The sales charge for mutual fund shares, quoted as a percentage of the funds invested; it cannot be more than 8.5 percent of investment.

The value of a present liquidity or projected series of cash flows in the future, accounting for the effects of time on value.

A publicly traded contract to buy or sell an asset at a specified time and price in the future.

A state or municipal bond secured only by the “full faith and credit” of the issuer.

To raise capital by issuing equity shares through a public exchange.

The total value of all final goods and services produced in a year in a nation’s economy. It is used as a fundamental measure of an economy’s growth based on its ability to use resources productively and provide for its members.

A stock that is expected to offer excessive rates of growth.

Cost of replacing insured property at time of loss.

An organization to provide “managed care” through reliance on primary care physicians and a network of specialists, with an emphasis on preventative care.

An employer owned and funded account to finance employee health care costs, with the employee choosing the type of coverage.

Individually owned and financed savings accounts that may be used to finance health care costs with tax-deductible contributions.

Bonds rated BB or Ba or lower, considered to have significant default risk.

A handwritten or oral will.

Earnings of a given period. In the case of an individual or household, this is generally cash from wages, interest, dividends, or assets (such as rental income from real estate) that can be used for consumption or saved.

A mutual fund designed to track the performance of an index for investors who seek diversification without having to select securities.

A mutual fund designed to track the performance of an index for investors who seek diversification without having to select securities.

Period characterized by rising prices, declining purchasing power, and lower currency values (one unit of currency is worth less because it buys a smaller quantity of goods and services).

A company’s first issuance of stock for trade in the public markets. Companies issue stock publicly to attract more investors and thus more capital for the company. When a company has its IPO is it said to “go public.”

The cost of debt expressed as an annual percentage of the principal.

To die without a valid will, leaving the disposition of assets and debts to the law.

Bonds rated BBB or Baa or higher and considered to carry insignificant default risk.

The original market price of a bond at issuance.

High yield bonds rated BB or Ba or lower and considered to have significant default risk.

Where labor is traded through hiring or employment and price is determined by the interaction of employers and employees.

A rental agreement used as a form of financing for automobile purchases.

Federal and state laws protecting consumers against products that repeatedly fail to meet standards of performance. The federal Magnuson-Moss Warranty Act was enacted in 1975.

An investment strategy in which asset allocation is based on the investor’s age or stage of life.

Insurance to compensate beneficiaries against the financial consequences of the death of the insured.

Periods of a person’s life based on age and personal circumstances that reflect different needs, goals, and financial capabilities.

Nearness to cash, or how easily and cheaply—with low transaction costs—an asset can be turned into cash.

Responsibility for another’s use of your possessions, or for another’s actions, under certain circumstances.

A trust created while the grantor is alive.

A document conveying your intentions for your personal care and management of your assets should you become unable to do so before your death.

A mutual fund that charges a sales commission or fee upon investment or purchase of shares; the load is stated as a percentage of invested funds.

Insurance to provide for permanent assistance with activities of daily living in the event of disabling injury or illness.

Insurance for the costs of serious injury or illness.

Organizations or networks of health care providers based on the principle of providing preventative care in order to better health and lower costs of health care. Such organizations also provide for emergency and special treatment services under various systems.

The total market value of a corporation’s capital.

The date on which payment of a financial obligation is due, such as bond redemption date.

Date at which a bond matures, or the end of the bond’s term, when the bond must be redeemed.

A federal program financing health care costs with eligibility based on income.

Responsibility for financial losses from injuries sustained in an accident for people outside of the car of the driver at fault.

A federal program financing health care costs with eligibility based on age (for those over age sixty-five).

The “sticker price” for an item

Bonds issued by a city, town or state to finance public projects. The coupon payments may, under certain circumstances, not be subject to federal income tax for the bondholder.

A portfolio of investments created by an investment company such as a brokerage or bank. It is financed as the investment company sells shares of the fund to investors. For investors, a mutual fund provides a way to achieve maximum diversification with minimal transaction costs through economies of scale.

The mathematical result of liabilities being greater than the value of assets, or debts being larger than the value that can be used to meet them.

Failure to take ordinary precautions or the failure to take usual precautions.

When used regarding open-end mutual funds, NAV refers to the redeemable value of each fund share at that time, given the market value of the fund’s assets and the number of shares outstanding.

The value of assets owned after creditors’ claims (debts) are accounted for, or literally, assets − debts.

Insured amount capped at a specified percentage of actual cash value.

A mutual fund that does not charge a sales commission or fee upon investment or purchase of shares.

A mutual fund in which shares are bought from and sold to the fund management; the number of shares is not limited.

The cost of sacrificing the next best choice because of the choice made; the value of the next best choice, which is forgone once a choice is made.

The right but not the obligation to buy or sell at a specific price at a specific time in the future; commonly written on shares of stock as well as on stock indices, interest rates, and commodities.

An agency of the federal government that guarantees defined benefit pensions in the case of employer default.

An employer-sponsored, defined benefit plan providing a regular, specified amount of pension, based on wages and years of service.

A type of managed care in which physicians, hospitals, and other care providers contract with an insurer to provide care at reduced rates upon referral from the insured’s primary care physician. Unlike the HMO, out-of-network providers may be used, but on a limited basis.

The legal right to act on your behalf should you become unable to do so before your death.

A type of managed care in which physicians, hospitals, and other care providers contract with an insurer to provide care at reduced rates upon referral from the insured’s primary care physician. Unlike the HMO, out-of-network providers may be used.

The costs of achieving a trade or “doing a deal” that do not contribute to the value of the thing being traded; a cost created by making an economic transaction.

The market in which the initial issuance or initial public offering of a stock occurs.

A benchmark interest rate understood to be the rate that major banks charge corporate borrowers with the least default risk.

The original amount of borrowed capital (a loan).

Equity not traded in a public market or exchange.

The legal process of validating a will and overseeing the orderly payment of debts and the distribution of assets.

Coverage of financial losses from injuries sustained in an accident if the driver at fault has insufficient insurance.

A written statement of a mutual fund’s structure, management, investment objectives, holdings, and historic and current performance; funds are required to make the prospectus available to all potential investors.

A currency’s usefulness and thus its value as measured by how much it can buy, that is, the quantity of goods and services that can be purchased with one unit of currency.

Analysts of bond default risk that assign ratings to bonds.

A period of economic contraction lasting at least six consecutive months or two consecutive quarters.

A bond that is eligible for redemption.

A tax rate that decreases as the amount to be taxed increases.

Market value of insured property at time of loss.

A state or municipal bond that will be repaid from revenues of the specific project it is financing.

A clause to a policy that adds specific benefits under specific conditions.

In finance, the probability that the value of an asset, income, or investment may decline in the future.

A retirement plan that may accept or distribute funds from another qualified retirement account without tax consequence or penalty.

An individual retirement account for which contributions are not deductible but withdrawals are not taxed.

A market in which outstanding shares are traded.

The process of choosing individual securities to be included in the portfolio.

The mandatory retirement program sponsored by the U.S. government to provide supplemental retirement income. It is funded by a tax (FICA) paid by employers and employees and by self-employed individuals who act as both employer and employee.

High yield bonds rated BB or Ba or lower and considered to have significant default risk.

In finance, the statistical measure that calculates the frequency and amount by which actual returns differ from the average or expected returns.

A will written on a preprinted form.

An organized market for the trading of corporate shares conducted by members of the exchange.

Shares issued to account for ownership, as defined by owners’ contributions to a corporation.

Costs that have been incurred in past transactions and cannot be recovered.

Life insurance providing coverage for a specified period of time.

A trust created by a will that becomes effective upon the death of the grantor.

The impact of the passing of time on the value of money, based on the premise that being separated from liquidity creates opportunity cost.

An individual retirement account for which contributions are tax deductible and withdrawals are taxed.

The movement of funds in a tax-advantaged retirement account from one trustee or asset manager to another that is not considered a withdrawal or distribution of funds.

Bonds issued by the U.S. government with a maturity of less than one year.

Bonds issued by the U.S. government with a maturity of more than ten years.

Bonds issued by the U.S. government with a maturity of between one and ten years.

A legal entity created to own and manage assets for the benefit of beneficiaries.

The clause of a homeowner’s policy insuring listed property.

A measure of the percentage of people in the labor force who are unemployed, that is, those who would like to be working but cannot find a suitable job.

Responsibility for financial losses from injuries sustained in an accident for people inside of the car of the driver at fault.

Benefits and premiums are flexible, in terms of both timing and amounts.

A stock whose return is based on its current underpricing by the market.

A consumption tax that spreads the tax burden among producers and consumers by taxing the value added to goods at each stage of production and consumption.

Life insurance that provides a guaranteed minimum benefit with potential to be greater depending on investment performance.

Private equity provided to facilitate excessive growth before the initial public offering of shares.

The process of earning full ownership in an employer-sponsored retirement plan according to length of service.

Strict liability, responsibility for intentional or unintentional events.

A manufacturer’s guarantee of product performance for a period of time.

Life insurance providing coverage until the insured’s death; it can also be used as an investment instrument.

A legal document detailing the disposition of assets upon death.

A bond that has a coupon rate of zero, and therefore a coupon of zero. Its only cash flow return is the principal repayment at maturity.