Download GLOSSARY

Banking and Financial System
Glossary page 1
GLOSSARY
A
adjustable rate mortgage (ARM) mortgage loan with a rate that changes over
the course of the loan (p. 178)
aggregate measures measures of the money supply—M1, M2, M3, and
MZM—which, taken together, are used to estimate its size (p. 64)
annual percentage rate (APR) the nominal rate on which interest is calculated
per year (p. 92)
annual percentage yield (APY) represents the effect of compounding (p. 92)
asset anything of value (p. 19)
asset-based lending banks analyze profit and loss (P&L) statements, tax
returns, and business plans to make lending decisions based on business income
(p. 210)
automated teller machine (ATM) allows customers access to almost any
banking function, any time of day, from almost anywhere in the world (p. 22)
B
balloon mortgage fixed rate mortgage in which the interest rate and payment
stay fixed, but at some specified point, the entire remaining balance of the loan is
due in one single “balloon” payment (p. 178)
bank run when many people try to withdraw their money from a bank at once
(p. 46)
bearer instrument negotiable instrument payable to whoever holds it (p. 112)
bill of exchange a negotiable and unconditional written order, such as a check,
draft, or trade agreement, addressed by one party to another (p. 113)
bridge loan a form of short-term loan used to cover expenses until long-term
financing is in place (p. 210)
brokerage brings together parties interested in making a transaction, such as
buyers and sellers of shares of stock (p. 243)
buy-down mortgage mortgage loan with which the borrower buys down, or
prepays, part of the interest in order to get a lower rate (p. 178)
C
CAMELS
bank examiners’ system of evaluation using six criteria of safety
and soundness, including capital adequacy, asset adequacy, management,
earnings, liquidity, and sensitivity to risk (p. 53)
cash card allows consumers to get cash, make transfers and deposits, or
perform other banking functions at an ATM (p. 129)
central bank governmental bank that manages, regulates, and protects both the
money supply and the banks themselves (p. 6)
Banking and Financial System
Glossary page 2
Certificate of Deposit (CD) a certificate offered by a bank that guarantees
payment of a specified interest rate until a designated date in the future (p. 87)
charge card allows a consumer to make purchases now and pay the account in
full at the end of the month (p. 129)
charitable remainder trust (CRT) an irrevocable trust designed to convert the
highly appreciated assets of a trustor (p. 254)
checking account the most common form of transaction account (p. 85)
collateral the item that secures the loan (p. 148)
commercial bank depository institution owned by stockholders who expect a
profit on their investments (p. 26)
commercial bank institution commonly thought of as a bank (p. 6)
commercial lending lending to business enterprises (p. 206)
commercial paper a short-term note or draft issued by a corporation or
government (p. 114)
commodity money medium of exchange based on some item of value, for
example, gold or precious stones (p. 65)
compound interest adding interest to the principal and paying interest on the
new total (p. 91)
consumer reporting agency (CRA) a company that compiles and keeps
records on consumer payment habits and sells these reports to banks and other
companies to use for evaluating creditworthiness (p. 155)
correspondent banks act as points of contact for other banks that do not have a
branch, agency, subsidiary, or corporation in the host country (p. 232)
correspondent banks large private banks that clear checks (p. 125)
country risk the entire range of political, legal, social, and economic conditions
that may put international business at risk (p. 233)
credit card allow consumers to pay all or part of their bills each month and
finance the unpaid balance (p. 129)
currency all media of exchange circulating in a country (p. 36)
currency risk the risk posed by variations in exchange rates between countries
(p. 232)
D
debit card allows consumers to transfer money from their designated account to
the account of the retailer (p. 129)
debt ratio the total obligations compared to the total income (p. 213)
debt service coverage ratio (DSCR) compares net operating income to the
total cost of debt (p. 214)
demand deposit an account that is payable on demand whenever the depositor
chooses (p. 85)
depositor person who puts money into a bank (p. 18)
Banking and Financial System
Glossary page 3
depository intermediary
financial institution that obtains funds from the
pubic and uses them to finance its business (p. 25)
deregulation loosening of government control (p. 21)
disclosure laws require that details of lending agreements be specified in
writing (p. 165)
discount rate the interest rate that the Federal Reserve sets and charges for
loans to member banks (p. 75)
discount rate the rate of interest that the Federal Reserve charges banks for
short-term loans (p. 54)
District Reserve Banks carry out banking functions for government offices in
their area, examine Federal Reserve System member banks in the district, decide
whether to loan banks funds, recommend interest rates, and implement policy
decisions of the Board of Governors (p. 51)
draft an order signed by one party (the drawer or drafter) that is addressed to
another party (the drawee), directing the drawee to pay to someone (the payee)
the amount indicated (p. 113)
E
e-check a digitally guaranteed type of electronic check to be transmitted on the
Internet (p. 130)
edge corporations financial corporations that are federally chartered and
allowed to engage only in international banking or other financial transactions
related to international business (p. 232)
electronic purse See smart card
electronic tokens a monetary system based on the exchange of digital money
via computer (p. 130)
elements of negotiability legal requirements that a check must meet in order
for a bank to cash it (p. 116)
endorsement notations on the back of a check that allow it to be negotiated (p.
118)
Equal Credit Opportunity Act (ECOA) prohibits the use of race, color,
religion, national origin, marital status, age, receipt of public assistance, or
exercise of any consumer right against a lender as a fact in determining
creditworthiness (p. 166)
equity the difference between what an item is worth and what is owed on it (p.
180)
escrow an amount to be paid to lenders in advance, from which they pay the
real estate taxes (p. 184)
estate the total property, real estate, and personal possessions that an individual
owns (p. 253)
excess reserves the reserves held by a bank beyond its reserve requirement; the
resources a bank uses to create money through its business transactions (p. 69)
Banking and Financial System
Glossary page 4
executor the person named in the will to administer the estate (p. 253)
F
factoring a form of asset-based lending that advances cash to a business in
exchange for its receivables (p. 210)
Fair Credit Reporting Act (FCRA) aims to protect the information that credit
bureaus, medical information companies, and tenant-screening services may
collect (p. 167)
Fair Debt Collection Practices Act (FDCPA) protects consumers from unfair,
deceptive, or abusive collection techniques (p. 167)
Federal Deposit Insurance Corporation (FDIC) guarantees deposits against
bank failures up to specific limits, currently $100,000 (p. 46)
federal funds rate
federal funds rate the rate at which banks borrow from each other (p. 54); the
amount of interest charged for short-term interbank loans (p. 75)
Federal Open Market Committee (FOMC) Federal Reserve committee that
makes discount rate decisions (p. 54)
fiat money money that is deemed legal tender by the government, and is not
based on or convertible into a commodity (p. 65)
FICO score a three-digit number that credit granters can use in making a loan
approval decision (p. 156)
financial intermediary agent that safeguards, transfers, exchanges, or lends
money (p. 5)
fixed rate mortgages loans with a fixed interest rate for the life of the loan (p.
177)
float brief period during the check-clearing process in which the same funds are
counted in both banks (p. 126)
foreclosure court-ordered sale of property (p. 177)
foreign exchange rate the value of one currency in terms of another (p. 235)
401(k) plan retirement plan that allows employees to make tax-deferred
contributions to a trust and direct their funds to be invested among a variety of
choices, getting their money back at departure or retirement (p. 252)
fractional-reserve system system created by goldsmiths whereby they needed
to keep back, or reserve, just enough of the total gold that had been deposited to
cover those who might want to withdraw their gold (p. 66)
G
governing documents collective term for deposit account documents (p. 100)
grace period an amount of time you have to pay the bill in full and avoid any
finance charges (p. 150)
Banking and Financial System
Glossary page 5
Great Depression the worst and longest economic crisis in the history of
Western industrialized nations; began in 1929 and lasted until about 1939 (p. 45)
I
inflation a collective rise in the supply of money, incomes, and prices (p. 47)
installment loan a loan for which the amount of the payments, the rate of
interest, and the number of payments (or length of term) are fixed (p. 147)
interbank transactions banks make and receive deposits to each other (p. 95)
interest a percentage earned over a period of time that is paid to the depositor
(p. 18)
interest the price paid for the use of money (p. 90)
intranet a private network that uses Internet tools and software to store forms,
data, and programs for internal use by a company (p. 23)
IRA individual retirement account (p. 252)
L
letter of credit an instrument given by a bank on behalf of a buyer (applicant)
to pay the bank of the seller (beneficiary) a given sum in a given time provided
that documents required by the letter are presented to the issuing bank (p. 234)
liability a cash obligation (p. 19)
lien a legal claim to the property to secure the debt (p. 148)
liquid asset anything that can readily be exchanged, like cash (p. 19)
liquidity a measure of how quickly things may be converted to something of
value like cash (p. 63)
loan-to-value ratio the principal amount of the loan divided by the value of the
securing property (p. 213)
loan-to-value relationship the value of the loan compared to the value of the
asset (p. 185)
M
margin stocks are bought for a fraction of their price, and then resold at a profit,
without the full purchase price of the stock ever having been paid (p. 45)
medium of exchange an agreed-upon system for measuring the value of goods
and services (p. 5)
member bank any bank that is part of the Federal Reserve System (p. 51)
merger occurs when one or more banks join or acquire another bank or banks
(p. 7)
money laundering a “paper trail” for currency created so that people cannot
deposit, invest, or exchange money in such a way as to conceal its illegal source
(p. 233)
Banking and Financial System
Glossary page 6
money market deposit accounts (MMDAs) time deposits that offer a higher
rate of interest than savings accounts and usually require a higher initial deposit to
open (p. 87)
money supply the liquid assets held by banks and individuals (p. 63)
mortgage a note, usually long-term, secured by real property (p. 177)
multiplier effect when money is deposited, it creates new deposits, which also
go out to customers as loans; this in turn creates more deposits, thus expanding
the amount of money in the system (p. 69)
N
negotiable instrument a written order or promise to pay a sum of money, either
to a specified party or to the person who holds it (p. 111)
niche market customers who live in defined locations or who use particular
services (p. 21)
non-depository intermediary financial intermediary that does not take or hold
deposits, but rather earns its money selling specific services or policies (p. 25)
O
online banking allows customers to perform banking transactions from their
home computers (p. 23)
open-end loan a loan on which both the amount owed and term are flexible (p.
150)
outsourcing refers to a firm’s practice of having an outside party supply a
product or service that the firm had been producing or performing itself (p. 246)
P
PITI principal, interest, taxes, and insurance; housing costs that the lender
considers in the loan analysis and are itemized on the monthly mortgage statement
(p. 184)
point a value equal to 1 percent of the loan (p. 178)
post-dated check check dated later than when it was written (p. 102)
primary reserves consist of cash on hand, deposits that may be due from other
banks, and the percentage required by the Federal Reserve (p. 69)
prime rate the rate that banks charge their best and most reliable customers (p.
75)
principal the amount borrowed (p. 148)
probate a court proceeding that settles an estate’s final debts and formally
passes legal title to property from the decedent to his or her heirs (p. 253)
profit what’s left of revenue after costs are deducted (p. 18)
promissory note a written promise to pay at a fixed or determinable future time
a sum of money to a specified individual (p. 114)
Banking and Financial System
Glossary page 7
R
redlining refusal of some banks to lend money to residents of certain
neighborhoods (p. 189)
reserve liquidity ways a bank converts its reserves readily into cash (p. 44)
retail bank financial institution that helps individuals not served by commercial
banks to save money, acquire loans, and invest (p. 5)
reverse mortgage a form of consumer loan tied to the appreciated value of a
property (p. 181)
right of rescission allows a consumer to change his or her mind about a loan
until midnight of the third business day following the signing of papers (p. 166)
S
savings and loan association (S&L) receive most of their deposits from
individuals, are chartered by either state or federal government, and are owned by
depositors who receive shares of the company (p. 26)
secondary reserves securities the bank purchases from the federal government,
usually in the form of government securities (p. 69)
secured loan a loan in which some item of value backs the loan in case the
borrower defaults on the loan (p. 148)
shared appreciation mortgage mortgage loan that can lower interest rates for
borrowers who agree to share later with the lender some part of the amount the
house appreciates (p. 180)
short-term loans loans for a year or less; a business may have many of these in
sequence or even concurrently to finance operations (p. 209)
Small Business Administration (SBA) federal government agency that offers
a number of financial, technical, and management programs to help businesses (p.
219)
smart cards credit, debit, or other types of cards with embedded microchips
(pp. 22, 130)
spread the difference between what a bank pays in interest and what it receives
in interest (p. 18)
stagflation a combination of a stagnant economy and high inflation (p. 47)
stale check check dated six months or more before it is presented for payment
or deposit (p. 102)
statement savings account provides a monthly or quarterly computerized
statement detailing all account activity, including interest additions and fees
charged (p. 87)
stored-value card See smart card
subprime rates rates that are higher than normal to offset the increased risk
represented by a less-than-perfect borrower (p. 154)
Banking and Financial System
Glossary page 8
T
term loans loans that finance permanent working capital, equipment, real
estate, business expansion or acquisition of another business (p. 209)
testamentary trust established by a will and takes effect at the donor’s death
(p. 253)
thrift institutions another term for mutual savings banks and savings and loan
associations (p. 26)
time deposit a deposit that is held for or matures at a specific time (p. 86)
transaction account an account that allows transactions to occur at any time
and in any number (p. 85)
trust an arrangement by which one party holds property on behalf of another
party for certain defined purposes (p. 251)
Truth in Lending Act (TILA) guarantees that all information about costs of a
loan are provided in writing to consumers (p. 166)
U
underwriting reviewing the loan for soundness (p. 153)
unsecured loan a loan backed only by the reputation and creditworthiness of
the borrower (p. 148)
V
variable annuity
(p. 252)
investment that offers an opportunity for tax-deferred growth
W
wholesale bank commercial bank that specializes only in business banking (p.
26)
will a document by which the individual gives instructions as to what is to
happen upon his or her death in regard to property and remains (p. 253)