KEY TERMS
actual rate of return the total rate of return, including capital gains and interest paid on an investment at the end of a time period
bond a financial contract through which a borrower like a corporation, a city or state, or the federal government agrees to repay the amount that it borrowed and also a rate of interest over a period of time in the future
bond yield the rate of return a bond is expected to pay at the time of purchase
bondholder someone who owns bonds and receives the interest payments
capital gain a financial gain from buying an asset, like a share of stock or a house, and later selling it at a higher price
certificate of deposit (CD) a mechanism for a saver to deposit funds at a bank and promise to leave them at the bank for a time, in exchange for a higher interest rate
checking account a bank account that typically pays little or no interest, but that gives easy access to money, either by writing a check or by using a “debit card”
compound interest an interest rate calculation on the principal plus the accumulated interest
corporate bond a bond issued by firms that wish to borrow
corporate governance the name economists give to the institutions that are supposed to watch over top executives in companies that shareholders own
corporation a business owned by shareholders who have limited liability for the company’s debt yet a share of the company’s profits; may be private or public and may or may not have publicly-traded stock
coupon rate the interest rate paid on a bond; can be annual or semi-annual
debit card a card that lets the person make purchases, and the financial institution immediately deducts cost from that person’s checking account
diversification investing in a wide range of companies to reduce the level of risk
dividend a direct payment from a firm to its shareholders
equity the monetary value a homeowner would have after selling the house and repaying any outstanding bank loans used to buy the house
expected rate of return how much a project or an investment is expected to return to the investor, either in future interest payments, capital gains, or increased profitability
face value the amount that the bond issuer or borrower agrees to pay the investor
financial intermediary an institution, like a bank, that receives money from savers and provides funds to borrowers
high yield bonds bonds that offer relatively high interest rates to compensate for their relatively high chance of default
index fund a mutual fund that seeks only to mimic the market’s overall performance
initial public offering (IPO) the first sale of shares of stock by a firm to outside investors
interest rate the “price” of borrowing in the financial market; a rate of return on an investment
junk bonds see high yield bonds
liquidity refers to how easily one can exchange money or financial assets for a good or service
maturity date the date that a borrower must repay a bond
municipal bonds a bond issued by cities that wish to borrow
mutual funds funds that buy a range of stocks or bonds from different companies, thus allowing an investor an easy way to diversify
partnership a company run by a group as opposed to an individual
present value a bond’s current price at a given time
private company a firm owned by the people who run it on a day-to-day basis
public company a firm that has sold stock to the public, which in turn investors then can buy and sell
risk a measure of the uncertainty of that project’s profitability
savings account a bank account that pays an interest rate, but withdrawing money typically requires a trip to the bank or an automatic teller machine
shareholders people who own at least some shares of stock in a firm
shares a firm’s stock, divided into individual portions
simple interest an interest rate calculation only on the principal amount
sole proprietorship a company run by an individual as opposed to a group
stock a specific firm’s claim on partial ownership
Treasury bond a bond issued by the federal government through the U.S. Department of the Treasury
venture capital financial investments in new companies that are still relatively small in size, but that have potential to grow substantially
usury laws laws that impose an upper limit on the interest rate that lenders can charge