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Appendices > Glossary of Financial Terms

B. Glossary of Financial Terms

adjustable rate mortgage (ARM)

A mortgage whose interest rate, and hence its monthly payments, can change over the life of the mortgage. The rate is based on some independent index, such as the prime interest rate. The rate is adjusted annually or at some other period specified in the mortgage terms.


A measure of mutual fund performance that compares a fund’s beta value with its actual performance. Alpha values above and below zero mean that a fund returned more or less than expected, respectively, based on its beta value.

annual expense ratio

The amount a mutual fund charges to manage and maintain your account. Expressed as a percentage.

back-end load

A mutual fund sales charge imposed when you sell your shares.

bear market

An extended period during which the stock market declines.


A measure of mutual fund performance that compares the fund to some benchmark, such as the Standard & Poor’s 500. A beta of 1.00 means that the fund goes up and down in lockstep with the benchmark. A beta of 1.15 means that if the benchmark goes up or down by a certain amount, the fund goes up or down by 15% more.

blue chip stock

Stock in a large, established, and consistently profitable company. Which stocks are considered to be blue chip stocks change over time.


An investment vehicle that consists of money loaned to a corporation or governmental body. Bonds are considered to be an income investment.


Can refer to an individual who oversees your investment account and provides investment advice. Can also refer to a firm (a brokerage) that provides these services.

bull market

An extended period during which the stock market shows a greater than usual upswing in prices.

capital cost

In auto leasing, the price of the vehicle.

capital cost reduction

In auto leasing, a down payment or trade-in.

capital gain

Profit from selling an investment, such as a stock, at a higher price than you paid for it.

closed-end lease

In auto leasing, a lease in which the value of the car at the end of the lease is set at the start of the lease.


A fee you pay to a brokerage for buying or selling shares of stock for you.

common stock

A share of ownership in a company. The price of common stock shares rises or falls depending on the fortunes of the company and the demand for the stock on the market.

corporate bond

A bond issued by a corporation.


Refers to the amount of interest paid by a bond.

debit card

It looks and works much like a credit card, but the amount of each purchase is deducted immediately from your checking account.


Income paid by a company to owners of its stock. Not all stocks pay dividends.

Dividend Reinvestment Plans (DRIPs)

An investment plan, usually run by a company, that lets you buy shares in the company without going through a broker and usually with reduced or no fees.


In real estate, the difference between the value of a property and the amount owed on it. In the world of investment, stocks are sometimes referred to as equities.

exchange traded funds (ETF)

A type of mutual fund that trades on the market just like stocks. Sometimes called closed-end funds.

excess mileage fee

A fee you pay at the end of an auto lease if you have driven more miles than permitted in the lease agreement.

fixed rate mortgage

A mortgage whose interest rate and payments remain constant for the entire life of the mortgage.

front-end load

A mutual fund sales charge you pay when you buy shares.

holding period

The amount of time you own an investment.

home equity loan

A loan that is backed by the equity in your house. Sometimes called a second mortgage.

income investment

An investment, such as bonds, that is purchased more for the regular income it produces (in the form of interest or dividends) and less for the change of capital appreciation.

index fund

A mutual fund that does not actively select stocks but rather invests in a broad market index of stocks.


A general, society-wide increase in prices and wages for the same underlying product or service.

junk bond

A bond issued by a company with a relatively poor credit rating. Junk bonds pay higher interest rates than nonjunk bonds, but carry a greater risk that the company will be unable to make payments or return principal.

load mutual fund

A mutual fund that charges a commission, or load, when you purchase shares of the fund.

marginal tax rate

The income tax rate you pay on the last dollar of your income.

market capitalization

The total value of a company’s stock (number of shares times current share price).

market index

Any one of many measures, such as the Dow Jones Industrial Average or the S&P 500, that combines the prices of a basket of stocks in a single number that acts as a summary of market changes.


The time until a bond becomes mature and is paid off.

money factor

The way the effective interest rate is expressed in auto leasing.

municipal bond

A bond issued by a governmental agency to fund public projects such as highways and schools. The income from municipal bonds is tax-exempt for many taxpayers, unlike income from corporate bonds.

mutual fund

An investment vehicle that consists of stocks and/or bonds from various companies that is managed by an investment company. Shares in this pool of stocks or bonds are sold to individual investors and represent a fractional ownership of the underlying investments.

no-load mutual fund

A mutual fund that does not charge a sales commission when you buy or sell shares.

open-end lease

An auto lease in which the value of the car is determined at the end of the lease.

P/E (price earnings) ratio

The price of a share of stock divided by the per-share earnings of the company. Can also be looked at as representing the price investors are willing to pay for $1 of earnings from a company.


Stands for principal and interest. Refers to the portion of the monthly mortgage payment that goes toward principal and interest (omitting escrow).


Stands for principal, interest, taxes, and insurance. Refers to the sum total mortgage payment due each month.

preferred stock

A share of ownership in a company that pays a fixed dividend. The dividends of preferred stock are paid before any dividends are paid on common stock, and they receive priority over common stock in the event of a liquidation. Unlike most common stock, preferred stock does not confer voting rights.


The amount you borrow on a loan.

REIT (Real Estate Investment Trust)

A company that owns and manages real estate, such as apartment buildings or shopping malls.


A group of corporations that are in similar lines of business, such as petroleum, automobiles, or energy.

sector funds

A mutual fund that limits its investments to companies in a particular sector.


A share of ownership in a company.

treasury bill

A short-term loan to the Federal government that matures in less than one year.

zero-coupon bond

A bond that does not pay regular interest but is sold at a discount and increases to its full face value at maturity.



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