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Financial Terms:      A - C     D - H    I - L    M - P    Q - T   U - Z

401(k): This qualified retirement plan allows eligible employees to contribute a certain amount of compensation on a pre-tax basis; earnings are tax deffered. Employers may match a stated percentage of employee contributions to the plan. In many cases, employees have general responsibilities for investment choices and enjoy the direct tax savings. The reduced cost and liability of 401(k) plans appeals to many employers.


401(k) Loan: A 401(k) loan is taken from a 401(k) retirement account. Certain plans allow an individual to withdraw a percentage of an account balance, with set minimum and maximum amounts allows. The loan is generally paid back, with interest, through payroll deductions. If an individual leaves an employer with an outstanding loan, the full amount of the loan is generally due. If the individual fails to repay the loan, it is considered a distribution, and ordinary income taxes are due. In addition, an early withdrawal tax penalty may apply for individuals under the age of 59½.


403(b): Similar to the 401(k), this type of qualified retirement plan is available to employees of nonprofit and government organizations.


Account Balance: An account balance is the net of credits and debits for an account at the end of a reporting period. For example, a credit card balance may show the amount you owe to the company as a result of your purchases, while a bank account balance may show the amount owed to you by the bank as a result of interest earned on your money.


Accounts Reconciliation: The beginning balance plus the sum of all entries on a ledger or in a checkbook register must equal the ending balance on an account statement. Deposits, interest received, and credits are added to the beginning balance. From this total amount, automatic withdrawals, checks outstanding, checks negotiated, and account charges are subtracted. When the resulting balance equals the ending balance on the account statement, the account is reconciled.


Active-Participant Status: This term applies to a person, or his or her spouse, who participates in an employer-sponsored retirement plan. The plans that qualify include the following: 1) a qualified pension, stock bonus, or profit sharing plan; 2) a qualified annuity plan; 3) a tax-sheltered annuity (TSA) plan; 4) a simplified employee pension plan (SEP); or 5) a local, state, county, or federally sponsored retirement plan.


Actuary: Insurance contracts and retirement plans require professional calculation of payments to be received and benefits to be paid. An actuary analyzes all probability and risk estimates based upon past experiences to confirm obligations are pragmatic and attainable.


Adjustable Rate Mortgage (ARM): Also called a variable rate mortgage, this mortgage has an interest rate that is adjusted periodically, usually at intervals of one, three, or five years, based on a measure or an index, such as the rate on US Treasury bills or the average national mortgage rate. In exchange for assuming some of the risk of a rise in interest rates, a borrower receives a lower rate at the beginning of an ARM than if he or she had taken out a fixed-rate mortgage.


Adjusted Gross Income (AGI): On a federal income tax return, AGI is the amount of income subject to federal income taxes. To determine AGI, subtract certain qualified deductions, such as unreimbursed business expenses or contributions to a traditional Individual Retirement Account (IRA), from gross income, which generally includes employment income, interest income, dividends, and capital gains.


Advance: A services company may establish a salary advance to assist new employees with initial cash flow problems or to help seasoned employees with emergency needs. The advance represents money received before it is actually earned. In addition, some businesses will establish an employee cash advance program to provide for business-related travel expenses.


Aggressive Growth Fund: This mutual fund has the objective of maximizing long-term capital growth, rather than dividend income, by investing in narrow market segments and small company stocks. Aggressive growth funds are designed for maximum capital appreciation and generally invest in companies with high growth rates.


Allocation Formula: Employers’ contributions to employee profit sharing plans are allocated to participants’ accounts based on an allocation formula. The formula also governs the reallocation of funds forfeited by employees who terminate from the plan.


Alternative Minimum Tax (AMT): This tax calculation adds certain tax preference items back into adjusted gross income in order to prevent taxpayers from escaping their fair share of tax liability by taking numerous tax breaks. If AMT liability is greater than regular tax liability, the taxpayer generally needs to pay the regular tax and the amount by which AMT exceeds regular tax.


American Stock Exchange (AMEX): Located in downtown Manhattan, AMEX has the third highest volume of trading of any stock exchange in the U.S. The bulk of trading on the AMEX consists of index options and shares of small to medium-sized companies.


Amortization: This process brings gradual extinction to a debt, loan, or mortgage over a specific span of time. It can also be used to deduct capital expenses over a period of time. Similar to depreciation, it is a method of measuring the consumption of the value of long-term assets like equipment or buildings.


Annual Percentage Rate (APR): The yearly cost of credit or a loan is expressed as a simple percentage number. This also includes any fees or additional costs associated with the agreement. The Federal Truth In Lending Act requires all consumer credit agreements and loans to disclose the APR to ensure the understanding of the real costs applicable to the transactions.


Annual Report: This yearly statement describes company management, operations, and financial reports. Annual Reports are sent to every shareholder and are available for public review. The Securities and Exchange Commission (SEC) requires an annual report published by any corporation issuing registered stock. A more exhaustive annual compilation of data is found in Form 10-K, which the SEC mandates from companies surpassing certain qualifications.


Annuitant: The person to whom an annuity is payable is called the annuitant.


Annuity: This long-term contract sold by life insurance companies guarantees payments (based on the claims-paying ability of the issuing insurer), fixed or variable, to the purchaser at regular intervals. Fixed annuities offer consistent, predictable returns, whereas variable annuities provide fluctuating returns based on the performance of an investment portfolio. Payments are usually scheduled to begin at a future time, such as retirement, but in certain cases, payment may begin immediately. Some annuities provide tax-deferred earnings, often as part of retirement plans.


Annuity Cash Refund: The contract for an annuity offering income for life may include a death benefit for the total premiums paid. When the annuitant dies, the annuity cash refund will be the net sum of premiums paid minus the amount received in annuity payments.


Annuity Certain: This option in an annuity contract allows the annuity owner to select a future level of income covering a specified number of years, generally ten years. If the annuitant dies before the expiration of the annuity payments, the remaining obligation is transferred to the designated beneficiary in the annuity contract.


Annuity Joint and Survivor: This annuity option provides for payments for two designated annuitants. Upon the death of the first annuitant, the surviving annuitant receives prearranged, continued payments for life, based on a percentage received by the first annuitant.


Annuity Joint Life: While two or more individuals may be named annuitants, payments cease at the death of the first annuitant in an annuity joint life contract.


Annuity Modified Refund: In a contributory retirement plan, the annuity beneficiary of a deceased retiree receives the accumulated balance of the pension fund, which is referred to as the annuity modified refund.


Annuity Payout Option: Payments from an annuity may be received in a variety of ways: as a fixed dollar amount, for a fixed period, or over the lifetime(s) of one or two annuitants. The annuitant chooses one of these alternatives as the payout option.


Application Fee: A lender may charge a fee to process a loan application. Paying this fee does not guarantee loan approval. Some lenders apply the cost of the application fee toward certain closing costs.


Appraisal: This assessment of a property’s value, performed by a qualified professional, is based on information from recent sales of similar properties.


Asset: An asset is any property with a cash value that is expected to provide future benefit, such as real estate, equipment, savings, and investments.


Asset Allocation: This process divides investments among different asset classes, such as stocks, bonds, and cash. The goal of asset allocation is to reduce portfolio risk through diversification. 


Asset Class: An asset class is a specific category of assets or investments, such as cash, bonds, stocks, or real estate. Assets in the same category tend to share similar characteristics and behave similarly in the marketplace.


Assignment: An assignment is the legal transfer of the entire or partial ownership of an asset, such as an insurance policy, to another person or entity.


Automatic Reinvestment: This prearranged investment plan automatically deposits mutual fund dividends or capital gains back into the fund to purchase additional shares, allowing the owner to take advantage of compounding.


Balloon Mortgage: This mortgage type has a final payment that is considerably larger than the preceding payments. Balloon mortgages are typically used when borrowers anticipate receiving a large sum of extra cash to pay the balance or when they expect to refinance before the balloon payment comes due.


Bankruptcy: An inability to pay outstanding debt, in full or in part, or declaring insolvency may lead to bankruptcy. Bankruptcy is an expensive process and may adversely affect future credit opportunities. Some more recognizable bankruptcy applications include the following:













Basis: The original cost and any additional outlays represent the cost basis in equity investments or property. The Internal Revenue Service computes the taxable gain, profit, or appreciation on the difference between the basis and the actual amount of sale. Therefore, defining basis as original price, and not as total cost, may incorrectly result in an inflated tax liability.


Basis Point: Basis points measure the variation in financial instruments that often fluctuate in very small increments. One basis point is equal to .01%; therefore, 100 basis points are equal to 1%. For example, a yield that has increased from 5.46% to 5.58% has increased 12 basis points.


Bear Market: A bear market is characterized by an extended period of declining prices, usually by 20%, in the financial markets. A prolonged downturn of general economic activity is often the catalyst for a bear market in stocks, whereas rising interest rates are typically responsible for a bear market in bonds. The bear market is the opposite of a bull market.


Beneficiary: This person or entity named in a will, life insurance policy, a qualified retirement plan, or an annuity is eligible, by the terms of such a policy or plan, to receive benefits upon the death of the insured or the plan participant.


Beta: A beta is a measure of a security’s price fluctuations (volatility) relative to an appropriate market index. For example, the Standard & Poor’s 500 Stock Index (S&P 500) has a beta of 1. Stocks with betas greater than 1 are subject to more rapid and extreme price fluctuations than the market. Conversely, price fluctuations for stocks with betas less than 1 are less frequent and smaller than the market. Conservative investors generally seek securities with lower beta values, while aggressive investors seek those with higher beta values.


Blue-Chip Stock: A blue-chip stock is the common stock of a company with a reputation for quality products, services, and management, and a long history of earnings growth and dividend payments. Examples of blue-chip companies include General Electric, International Business Machines, and DuPont.


Bond: This debt security issued by a corporation, government, or governmental agency obligates the issuer to pay interest at pre-determined intervals and repay the principal at maturity. Every bond has a set face value, also known as a par value, which names the amount of money the bondholder will receive when the bond reaches the date of maturity. The face value will never change, but the market value of a bond may fluctuate. If a bondholder sells a bond before its date of maturity, he or she may receive more or less than the face value. 


Broker: This financial professional mediates between the buyer and seller during the trading of services or property, such as securities, real estate, insurance, or commodities. In return for services, the broker generally receives a commission.


Budget: Projected income and expenses for a given period is called a budget. A surplus budget indicates profits are expected, a balanced budget anticipates that revenues will equal expenses, and a deficit budget suggests expenses will exceed expenses.


Bull Market: A bull market is characterized by an extended period of rising security prices, usually by 20% in financial markets. A high volume of trading often occurs in a bull market, which is the opposite of a bear market.


Business Succession: Business succession is the prearranged process that addresses the future orderly transfer of a business entity and plans for every alternative contingency that would affect any transfer. Business succession broadly involves legal, financial, tax, and family concerns.


Buy-and-Hold: This investment strategy advocates holding securities for the long term, while ignoring short-term price fluctuations in the market. Unlike market-timing investors, who actively buy and sell securities hoping to turn quick profits on short-term price fluctuations, investors who buy and hold securities hope for substantial gains over time.


Buy-Sell Agreement: This written, legal contract provides for the purchase of all outstanding shares from a business owner who wishes to sell, wants to terminate involvement, is permanently disabled, or has died. A buy-sell agreement generally allows for a different, future ownership structure. The agreement may be funded with life and disability income insurance, and it may contain specific purchase arrangements.


Cafeteria Employee Benefit Plan: Also known as flexible benefit plans, cafeteria plans offer a variety of benefit options from which individual employees may select, such as health insurance, life insurance, and retirement benefits. Depending on personal needs and finances, employees may voluntarily elect benefits of their choice.


Capital Gains Distribution: A capital gains distribution is a payment to shareholders of profits realized on the sale of an investment company’s securities.


Capital Gains Tax: This tax is levied on profits from the sale of securities or other assets, such as land, buildings, equipment, and furniture.


Capital Loss: A capital loss is a decrease in the value of an investment or a capital asset from its purchase price.


Cash Advance: This instant loan may be obtained from a line of credit or a credit card account. Issuers generally charge interest from the date the advance is made until it is repaid. They may also charge a transaction fee based on the amount of the advance.


Cash Basis: This accounting method recognizes cash inflows or outflows when they are actually expended or received. Accrual accounting, in contrast, recognizes income and expenses at the time revenue is earned (but not necessarily received) and liabilities are incurred (but not necessarily paid).


Cash Budget: A cash budget is used to quantify an immediate, short-term cash flow. Reviewing daily, weekly, and monthly receivables and expenditures is essential for a resolution to establish credit lines or invest short-term idle cash.


Cash Flow: This accounting statement shows the aggregate of all cash inflows and outflows. The total during any given specified time period may be expressed as positive cash flow or negative cash flow.


Cash Management: Cash management is the process of channeling available cash into expenditures that enhance productivity, directly or indirectly.


Cash Surrender Value: The cash surrender value is the amount the policyowner receives when voluntarily terminating a cash value life insurance or annuity contract before its maturity or before the insured event occurs. Computation of the cash surrender value is stated, by law, in the contract.


Casualty Loss: These usually sudden and unexpected losses are due to damage, destruction, fire, or theft. Generally, they are reimbursed either in full or in part by insurance contracts. Amounts of compensation listed for losses are not usually tax deductible if full restitution is made by the insurance carrier. However, claims denied or not covered are potentially tax deductible.


Certificate of Deposit (CD): A CD is an agreement with a commercial bank that promises a fixed interest rate on funds deposited for a specified period of time. Issued in denominations ranging from $100 to $100,000, with maturities ranging from a few weeks to several years, CDs typically earn compound interest and are insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. There may be a penalty if funds are withdrawn before reaching maturity.


Check: This written, signed, and dated instrument allows for the transfer of money from a bank account to a payee.


Claim: A claim is a request for payment under the terms of an insurance policy.


Claims-Paying-Ability Rating: This figure provides an assessment of an insurance company’s ability to pay claims, relative to other insurance companies.


Closing: Closing can refer to the end of a trading session or the process of transferring real estate from a seller to a buyer.




Closing Costs: Also called settlement costs, these expenses include any costs (over and above the price of the property) involved in transferring real estate from a seller to a buyer. Typically included are fees or charges for loan origination, discount points, appraisal, property survey, title search, title insurance, deed filing, credit reports, taxes, and legal services. Closing costs do not include points and the cost of private mortgage insurance (PMI).


Cloud on Title: A cloud on title is an apparent or potential claim, lien, or right on real estate. When present, the title is not clean, and a quitclaim deed must be filed to resolve the potential hindrance. For instance, a paid loan with property secured may not have been recorded, or a deceased owner may not have been removed from the deed to a house or title of a car.


Combined Financial Statement: An individual or corporation may own more than one affiliated business enterprise. Each has a complete set of financial documents. To provide a financial overview of all affiliates, a combined financial statement will present side-by-side accountings of balance and net worth statements.


Commercial Loan: Businesses in need of short-term financing will frequently bolster immediate cash flow with a commercial loan. The loan will be based on the credit worthiness of the business and/or owner and the prime lending rate.


Commercial Paper: This unsecured, short-term debt instrument is used by corporations to fund short-term liabilities. Since firms must have high-quality debt ratings to secure this funding, commercial paper is usually considered a safe investment. Maturity on the investment is usually less than six months.


Commission: This fee is charged by an agent for his/her services in facilitating a transaction, such as buying or selling securities or real estate, based on the dollar amount of the trade, the transaction, or the number of shares involved.


Commitment: This written agreement specifies the terms and conditions under which a lender will loan and a borrower will borrow funds to finance a home.


Common Stock: This security represents partial ownership, also called equity, in a corporation. Common stock ownership entitles a shareholder to participate in stockholder meetings and to vote for the board of directors.


Compounding: This process applies investment growth not only to the original investment, but also to income and gains reinvested in prior periods. To illustrate, if you earn compound interest on savings, you earn interest on the principle amount and the accumulated interest, as it is earned. If you earn simple interest on savings, you earn interest based only on the principle amount.


Construction Loan Note: This short-term obligation, in the form of a note, is used to fund a construction project. In most cases, the note issuers will repay the note obligation using a long-term bond, the proceeds of which can pay back the note. As an example, a city might use a construction loan note to fund a housing project to meet the demands of its growing population.


Contingent Beneficiary: On most insurance applications, owners have the option to name a primary beneficiary and a contingent, or secondary, beneficiary. At the death of the insured, a death benefit may be payable to a beneficiary. If the primary beneficiary revokes, is ineligible, or is deceased, the contingent beneficiary receives the proceeds. When no individual is named, proceeds are usually payable to the deceased’s estate.


Contingent Liabilities: A contingent liability is the possibility of an obligation to pay certain sums on future events. It also refers to defined obligations for which the chances of payment are minimal. 


Convertible Term Insurance:  In contrast to nonconvertible term life insurance, convertible term insurance provides the policyholder with a voluntary right (as described in the policy) to convert the face amount coverage in term insurance to a guaranteed issued identical face amount of whole life insurance.


Corporate Bond: This debt security is issued by a corporation, as opposed to the government, and it obligates the issuer to pay interest periodically and repay the principal at maturity. Corporate bonds generally feature higher interest rates because of the possible default risk, and the interest earned is often taxable. 


Corporation: State and federal laws permit a group of people to act jointly for business and tax purposes. Individuals who comprise the corporation are able to incur debt and realize profit without immediate legal or taxable liabilities. The corporate entity provides the advantages of attracting outside capital by selling shares of ownership, protecting owners from liability beyond their investment outlay, providing for continuity of operations beyond the lives of current shareholder owners, and allowing change of ownership through transfer of shares.


Correction: Correction is defined as reverse movement, usually downward, in the price of an individual stock, bond, commodity, or index, which brings it more in line with its underlying fundamental value. If prices have been rising on the market as a whole, then fall dramatically, this is known as correction with an upward trend.


Co-Signer: This individual adds his or her signature to a loan or a credit card agreement along with the principal applicant, thereby assuming responsibility for the outstanding balance if the applicant defaults.


Covenant not to Compete: A contract to sell a business, offer employment, or form a partnership often includes a clause that obligates a party to refrain from performing similar professional or business activities. The legal enforcement of a covenant not to compete depends on the wording, compensation, duration, and situation.


Coverdell Education Savings Account (Coverdell ESA): Formerly known as the Education IRA, this savings vehicle allows parents to accumulate tax-free savings on money earmarked for a child’s college education. There are limits on income eligibility and on how much may be set aside per year.


Credit History: A credit history is a record of how a party has paid past debts.


Credit Line: This revolving agreement allows a person to borrow any amount up to a preapproved limit for purchases or cash advances. As the outstanding balance is paid off, credit again becomes available to fund new purchases or cash advances.


Credit Rating: This formal assessment evaluates the ability of individuals and corporations to handle credit. The credit rating, which may be used by lending institutions when considering loan applications, is based on a party’s history of borrowing and repayment, as well as the availability of assets and the extent of liabilities.



Chapter 7: A debtor (individual) is declared bankrupt, and a court appointed trustee initiates a liquidation process and a discharge of all eligible debts. The debtor has no financial sources to attempt a reorganization. A separate taxable entity is created.


Chapter 11: A debtor (business, individual, or partnership) is declared bankrupt but is allowed reorganization to attempt debt repayment. Creditor approval is required. A separate taxable entity is created.


Chapter 13: A debtor (individual or sole proprietor) is declared bankrupt but is allowed to retain estate-related assets and to restructure debt obligations for eventual payment. No creditor approval is required.

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