Finance terms, defined

Amortisation is the repayment of a debt through fixed regular payments, each covering the interest due first and putting the rest toward the principal, so the balance reaches zero with the final payment.

APR, short for annual percentage rate, puts the yearly cost of borrowing into one rate on the balance owed, taking in the interest charged plus the set-up fees a lender is required to include.

A biweekly mortgage plan pays half the scheduled monthly amount every two weeks. Twenty-six half payments a year add up to thirteen monthly payments instead of twelve.

A car lease pays for the value a vehicle loses over the term rather than for the whole vehicle. The payment is a depreciation part plus a rent charge for the money involved.

Collateral is an asset a borrower pledges against a loan, and the lender can take and sell that asset if the loan is not repaid. Pledging one usually lowers the rate charged.

The balance reported on revolving credit divided by the total limit on that credit, written as a percentage. Instalment loans sit outside the ratio.

In a mortgage, escrow is an impound account that collects a share of projected property tax and homeowners insurance with each payment, then pays those bills when they come due.

A HELOC is a revolving line of credit secured by home equity. The borrower draws only what is needed, and interest is charged on the drawn balance rather than on the unused line.

An interest only mortgage charges interest on the full balance and repays no principal during an opening interest only term, so the balance is unchanged when that term ends.

Loan to value, or LTV, is the loan balance divided by the property value, expressed as a percent. The remainder of the value is the owner's equity.

A margin account lets an investor buy eligible securities with personal cash and money borrowed from the broker. The securities serve as collateral for that loan.

Money factor is the finance rate on a car lease, quoted as a small decimal instead of a percent. Multiplying it by 2400 converts it to an equivalent annual percentage rate.

Mortgage points, or discount points, are prepaid interest: a cash charge at closing, usually 1 percent of the loan per point, paid to cut the contract rate.

An origination fee is what a lender charges to set up a new loan, usually quoted as a percentage of the amount borrowed and then paid in cash, deducted from the money advanced, or added to the balance.

PITI is a housing payment split into four parts: principal, interest, property taxes and homeowners insurance. The first two go to the lender, the last two are collected to pay bills when due.

Principal is the sum borrowed or invested, separate from any interest charged or earned on it. On a loan it is the balance still owed, and only the part of a payment left after the interest due reduces it.

Private mortgage insurance, or PMI, is a premium a mortgage lender requires when the down payment is under 20 percent of the purchase price. It protects the lender, not the borrower.

Refinancing is replacing an existing loan with a new one, usually for a lower rate, a different term or a smaller payment. The new loan pays off the old balance.

The remaining loan balance is the principal still owed after a given number of payments. It is the original balance grown at the loan rate, less the payments made so far.

A secured loan is borrowing backed by a specific asset the lender can take and sell if payments stop, such as the house behind a mortgage or the car behind an auto loan.

An unsecured loan is borrowing backed only by a promise to repay, with no asset pledged, so the lender prices it on credit history, income and the debt already owed.

The money moving into and out of your accounts over a period, and the difference between the two. A positive figure means more came in than went out.

Spending on things you choose rather than have to buy, such as eating out, travel and entertainment. It is the part of a budget that can be cut without breaking a commitment.

Cash held in an accessible account to cover unexpected costs or a loss of income, kept separate from savings earmarked for planned spending.

Expenses that stay the same each period regardless of how much you use, buy or produce, such as rent, insurance premiums and loan payments.

Take-home pay: gross wages minus FICA and the income-tax withholding taken on this check. It is what lands in the account, not the tax bill for the year.

The total value of everything you own minus everything you owe. It measures financial position at a single point in time, not how much you earn.

Savings rate is the share of income saved rather than spent, written as a percent. The answer depends on whether the base is gross pay or take-home pay.

Money set aside a little at a time for a known future expense, so the cost is spread across the months before it falls due instead of landing in one.

Expenses that rise and fall with how much you use, buy or produce, such as groceries, fuel, hourly labour and the materials in each unit sold.

A budgeting method that assigns every unit of income a job until nothing is left unallocated, so income minus all the allocations equals zero.

An asset is anything a company owns or controls that is expected to bring in future economic benefit, such as cash, inventory, equipment or a patent.

A balance sheet is a snapshot of what a company owns and owes on one specific date, with assets on one side and liabilities plus equity on the other.

Book value is the amount an item is carried at in the accounting records: original cost less accumulated depreciation for a single asset, or total assets minus total liabilities for a whole company.

Days sales outstanding plus days inventory outstanding, minus days payable outstanding: how long cash is tied up in customers and stock after counting how long the firm takes to pay suppliers.

Days sales outstanding, or DSO, is accounts receivable divided by credit sales for a period, multiplied by the number of days in that period. It is the average collection wait.

Discounted cash flow, or DCF, values an asset as the present value of the cash it is expected to produce, each amount reduced by a discount rate for the wait and the risk.

Debt service coverage ratio, or DSCR, is net operating income divided by the principal and interest payments due over the same period. A result above 1 means income covers the payments.

EBITDA is earnings before interest, tax, depreciation and amortisation: operating profit with the depreciation and amortisation charges added back, so trading is measured before financing and tax.

The value of a firm's operations: equity value plus interest-bearing debt minus surplus cash. It is the claim on the business before asking who funded it.

Equity is what owners are left with once every liability is settled: total assets minus total liabilities, the residual claim on a business, also called net assets or shareholders' funds.

Free cash flow is the cash a business has left once it has met its operating costs and taxes and paid for capital spending: cash from operations minus capital expenditure.

Operating profit before interest and tax, divided by interest expense. The result is a multiple: how many times the operations earned the interest bill in the period.

A liability is an obligation a company owes to someone else, settled later by paying cash, handing over goods or providing a service.

NOPAT is net operating profit after tax: operating profit multiplied by one minus the tax rate. It measures what the operations earn with financing left out.

The offer price minus the unaffected share price, divided by the unaffected price. A negative figure is a discount to the close from before the news leaked.

The profitability index is the present value of a project's future inflows divided by its initial outlay. A result above 1 corresponds to a positive net present value.

Net income divided by book equity, as a percentage. It is a return on the residual claim after interest, not a return on the operating capital.

NOPAT divided by invested capital, as a percentage. NOPAT is EBIT after tax. Invested capital is the operating capital tied up in the firm.

Working capital is current assets minus current liabilities: the short-term resources a business has to cover the obligations falling due within the next year.

A sustained fall in market prices, commonly dated from a peak once prices have dropped 20 percent or more. A fall of around 10 percent is usually called a correction instead.

The gap between the highest price a buyer is currently willing to pay for an asset and the lowest price a seller will accept. It is a real cost: buying then selling back pays the whole of it.

A sustained rise in market prices. The common convention dates one from a low point once prices have gained 20 percent or more, though no official body sets that threshold.

A call option gives its buyer the right, but not the obligation, to buy an underlying asset at a fixed strike price by a stated expiry. The buyer pays a premium for that right.

Earnings per share is profit available to common shareholders divided by the number of shares outstanding. Basic EPS uses shares issued, diluted EPS assumes convertible claims convert.

The Graham number is the square root of 22.5 times earnings per share times book value per share. It is a rough ceiling price for a defensively selected stock.

An instruction to buy or sell only at a stated price or better. It puts certainty of price ahead of certainty of execution, so it can go unfilled.

How quickly an asset can be sold for cash near its quoted price. A deep market absorbs a large order with little movement in price; a thin one does not.

The total market value of a company's shares, found by multiplying the share price by the number of shares outstanding. It is what buyers say the equity is worth, not what the business owns.

An instruction to buy or sell straight away at the best price currently available. It puts certainty of execution ahead of certainty of price.

A company's share price divided by its earnings per share. It shows what buyers are paying for each unit of annual profit, so a higher ratio means a higher price for the same earnings.

A put option gives its buyer the right, but not the obligation, to sell an underlying asset at a fixed strike price by a stated expiry. The buyer pays a premium for that right.

A stock split divides the same company into more shares. Share count is multiplied by the split factor and the price per share is divided by that factor, so market capitalisation is unchanged at the split instant.

After tax return is the nominal return multiplied by one minus the tax rate applied to it. The difference between the two is the tax drag on that account.

A return over any length of time restated as the steady yearly rate that would have produced the same result, so periods of different lengths can be compared on one scale.

The present value of an annuity is the single amount today that is worth the same as a fixed series of equal future payments, discounted at a chosen rate.

Annual percentage yield: the percentage a balance grows over one full year once compounding is counted, so it already includes the interest that earlier interest earns.

One hundredth of a percentage point, so 100 of them make 1 percent. The unit exists so that a change in a rate cannot be read in two different ways.

Cap rate, short for capitalisation rate, is net operating income divided by purchase price. It is this year's income yield on the property, before debt service and income tax.

Cash-on-cash return is annual cash flow after operating costs and debt service, divided by the cash the buyer invested. It is a one-year cash yield on the equity cheque.

Current yield is a bond's annual coupon, in cash, divided by the price paid for it. It measures the income arriving this year and stops there.

Dividend yield is the annual dividend per share divided by the current share price, written as a percent. It counts cash paid out to shareholders and nothing else.

Earnings yield is earnings per share divided by the share price. It is the price to earnings ratio inverted, which puts a share price on the same scale as a rate.

The rate a nominal annual rate actually amounts to over a year once compounding within the year is counted. It is what makes different compounding frequencies comparable.

Gross rent multiplier, or GRM, is purchase price divided by annual scheduled rent. It is a rent multiple, not a profit rate.

Macaulay duration is the present-value-weighted average wait for a bond's remaining cash flows, measured in years. Coupons pull that average in before maturity.

Modified duration is Macaulay duration divided by one plus the periodic yield. It estimates the percent change in a bond's price for a one percentage point change in yield.

Net operating income, or NOI, is rental income less a vacancy allowance and less operating expenses. It is measured before mortgage payments, depreciation and income tax.

An interest rate as quoted, before adjusting for compounding within the year or for inflation. It is the headline figure rather than what is actually earned or paid.

The one percent rule is a rental property screen that asks whether monthly rent is at least 1 percent of the purchase price. It is a filter, not a measure of return.

A perpetuity is a level payment that continues without end. Its present value is the payment divided by the discount rate, provided the rate is above zero.

Present value is what a future cash flow is worth today at a stated rate: the amount that would grow into that future sum if the rate is earned for the wait.

A return or interest rate after inflation has been taken out, measuring the change in what the money can buy rather than the change in its face value.

Everything an investment produced over a period, the change in price and the income it paid, expressed together as one percentage of the starting value.

The income an investment pays over a period, stated as a percentage of its price or face value. In most of its forms it counts the cash paid out and not the change in the price.

Yield to maturity is the single discount rate at which a bond's remaining coupons and its face value, discounted back to today, equal the price paid for it.

Beta measures how much an investment tends to move when the overall market moves. A beta of 1 tracks the market, above 1 amplifies its moves, and below 1 dampens them.

The capital asset pricing model, or CAPM, estimates a required return as the risk-free rate plus beta times the extra return expected from the market above that risk-free rate.

Correlation measures how closely two investments move together, on a scale from minus 1 to plus 1, where plus 1 is lockstep, minus 1 is a mirror image and 0 is no linear relationship.

A drawdown is the fall from an investment's previous peak value to its lowest point before a new peak is set, quoted as a percentage of that peak.

A risk premium is the extra return an investor expects above the risk-free rate as payment for accepting uncertainty.

The Sharpe ratio is a portfolio's return minus a matching risk-free rate, divided by the standard deviation of that portfolio's returns. The result is a ratio, not a percent.

The Sortino ratio divides return above a stated target by downside deviation, the spread of results below that target. Upside variation is not treated as risk.

Standard deviation of returns measures how far an investment's period returns typically land from their own average. It is the number usually quoted as volatility.

Systematic risk is the market-wide risk that hits nearly every asset at once, from recessions to interest rate moves, and holding more positions does not remove it.

The beta the operations would have if they were all-equity financed: equity beta divided by one plus after-tax debt-to-equity, with debt beta taken as zero.

Unsystematic risk is the risk attached to one company or industry, such as a recall or a lost lawsuit, and holding many unrelated positions removes most of it.

Volatility is how much an investment's return swings up and down around its average, usually quoted as the annualised standard deviation of those returns.

The profit on an asset worth more than it cost, measured as value minus the cost basis. The gain is unrealised while you hold the asset and realised, at sale proceeds minus basis, once you sell.

A certificate of deposit, or CD, is a bank deposit committed for a fixed term at a rate agreed when it is opened. Withdrawing before the term ends usually costs an interest penalty.

Coast FIRE is the point at which savings already invested would compound into a retirement target by the chosen date without any further contributions.

Interest paid on both the money you put in and on the interest already added to it, so the balance grows by a larger amount in each period than in the one before.

A cash payment a company makes to its shareholders out of profits, paid on a schedule the board sets and can change, rather than owed on fixed dates the way a bond coupon is owed.

Investing a fixed amount on a fixed schedule whatever the price, so the same money buys more shares when prices are low and fewer when they are high.

A 401(k) match is money an employer adds to a workplace retirement plan, usually a stated rate applied to a stated slice of pay, up to a cap, and only on what you actually defer.

A fund whose shares trade on a stock exchange through the day, so its price moves continuously rather than being struck once a day the way a mutual fund's is. ETF is short for exchange-traded fund.

An ETF premium is the gap between an ETF's exchange price and its net asset value, expressed as a percent of NAV. Price above NAV is a premium. Price below NAV is a discount.

The yearly running cost of a fund, quoted as a percentage of the money you hold in it and taken out of the fund's assets rather than billed to you separately.

FDIC insurance protects eligible deposits at an insured bank if that bank fails. Coverage is automatic and is measured per depositor, per insured bank, and per ownership category.

A fund that copies a published market index, holding the same securities in close to the same weights, so its return tracks the index instead of trying to beat it.

A pooled fund that invests many people's money in a single portfolio and prices its shares once a day, after the market closes, at net asset value.

Net asset value, or NAV, is a fund's assets minus its liabilities, divided by the number of fund shares outstanding. It is the accounting value of one fund share.

A Series I bond is a nonmarketable United States savings bond whose composite rate combines a fixed rate set at purchase with a semiannual inflation rate based on CPI-U.

Simple interest is interest paid only on the original principal, so the amount added each period stays the same for as long as the rate and the principal do.

TIPS are marketable United States Treasury notes and bonds whose principal is adjusted with the CPI-U. The coupon rate is fixed, but each interest payment is applied to that changing principal.

A Treasury bill is a short-term United States Treasury security that pays no coupon. It is purchased at a discount to face and redeemed at face at maturity.

The additional Medicare tax is a 0.9 percent charge on wages and self-employment earnings above a threshold set by filing status. Only earnings above the threshold are taxed.

Tax charged on the profit made when an asset is sold for more than it cost, calculated on the gain above the cost basis rather than on the sale price.

Total tax paid divided by total income, giving the average rate across everything you earned rather than the rate charged on the last dollar of it.

The annual gift-tax exclusion is a per-recipient cap on present-interest gifts. Gifts at or under the cap generally do not use the lifetime exemption. Gifts above it create an excess that must be accounted for.

The home sale exclusion keeps a capped amount of gain from the sale of a main home out of taxable income, provided ownership and use tests are met.

The tax rate that applies to your next dollar of income, which is the rate on the topmost slice of what you earn rather than one applied to your income as a whole.

Net investment income tax, or NIIT, is a 3.8 percent surtax on a defined slice of investment income for filers whose modified AGI clears a threshold.

Money that comes out of gross pay before income tax is worked out, so it never enters taxable income for the year and the saving lands at your top rate.

A primary insurance amount is the Social Security monthly worker benefit at full retirement age, produced by applying the 90, 32 and 15 percent bend-point formula to average indexed monthly earnings.

Qualified business income, or QBI, is generally net profit from a pass-through trade after stated add-backs and haircuts. In the uncapped teaching case the deduction is 20 percent of QBI.

A required minimum distribution is the least that must leave certain retirement accounts in a year, found by dividing the prior year-end balance by an IRS life-expectancy factor.

A Roth conversion takes pre-tax retirement money, adds it to a Roth account, and includes the converted amount in taxable income for that year.

Self-employment tax is Social Security plus Medicare charged on net earnings from self-employment. The tax base is 92.35 percent of net, and the combined teaching rate on that base is 15.3 percent.

A tax bracket is a band of taxable income that meets one statutory rate. Income fills the lowest band first, then the next. Each band keeps its own rate after a higher one begins.

Money that grows without being taxed each year, with the income tax on it falling due later, when it is withdrawn, rather than as the growth happens.

Tax-equivalent yield is the taxable yield that leaves the same after-tax income as a given tax-exempt yield, at a stated marginal tax rate.

Income, or an account, that a particular tax does not apply to, so the earnings are kept in full instead of being taxed now or taxed at withdrawal.

Selling an investment that has fallen in value so the loss becomes real for tax purposes and can be set against realised gains, then reinvesting the proceeds.

An ordinary brokerage or bank account with no special tax treatment, where interest, dividends and realised gains are taxed in the year they arise.