Financial Independence Vocabulary

Question 1

Stock

Answer 1

A security that represents ownership in a corporation as opposed to a bond, which represents debt. (This is mostly a buy and hold asset even if you get small dividends from it)

Question 2

401k

Answer 2

A retirement plan that allows an employee to put a percentage of earned wages into a tax-deferred investment account provided by the employer. The employee chooses the investment plan. The employee chooses the investments.

Question 3

403b

Answer 3

A retirement plan similar to a 401k plan, but one which is offered by nonprofit organizations, rather than corporations.

Question 4

Adjusted Gross Income (AGI)

Answer 4

A number used to determine your federal income tax; it is your gross income minus deductions.

Question 5

Asset

Answer 5

Something of value owned by a company (or yourself), tangible assets included machinery, real estate, inventory, etc. Intangible assets include patents, goodwill, etc.

Question 6

Asset Allocation

Answer 6

The process of dividing investments among different kinds of assets, such as stock, bonds, real estate, and cash to optimize the risk, reward trade off based on an individual’s specific investment goals.

Question 7

Asset Class

Answer 7

A type of investment, such as stocks, bonds, real estate, or cash.

Question 8

Bond

Answer 8

A security that represents debt of the issuer, which can be a corporation, a municipality, or the US government. The issuer is required to pay the bondholder a specific rate of interest for a specified time, when the bond matures, the issuer must pay the bondholder the entire amount of the debt, known as face value.

Question 9

Business Risk

Answer 9

Risk associated with the unique circumstances of a particular company, as they might affect the price of that company’s securities.

Question 10

Certificate of Deposit

Answer 10

Official receipts issued by a bank stating that a given amount of money has been deposited for a certain length of time at a specified rate of interest.

Question 11

Consolidated Omnibus Reconciliation Act (COBRA)

Answer 11

A health insurance plan that allows an employee who leaves a company to continue to be covered under the company’s health plan for a certain time period and under certain conditions.

Question 12

Consumer Debt

Answer 12

All debt including credit card debt, vehicle loans, personal loans.

Question 13

Corporate Bond

Answer 13

A bond issued by a corporation. Corporate bonds often pay higher rates than government or municipal bonds, because they tend to be riskier.

Question 14

Corporate Bond Fund

Answer 14

A collection of corporate bonds.

Question 15

Deductible

Answer 15

The amount of money an insured has to pay out-of-pocket when they file a claim before the insurance company will make a payment.

Question 16

Default Risk

Answer 16

The possibility that a bond issuer will fail to repay principal and interest to a bondholder in a timely manner.

Question 17

Deferment

Answer 17

Allows the borrower to postpone making principal and interest payments on a student loan if certain hardship conditions apply. It may be allowed if the borrower is still in school, unemployed after graduation, or experiencing economic hardship for up to three years.

Question 18

Diversification

Answer 18

A strategy designed to reduce risk by combining a variety of investments that are unlikely to all move in the same direction. Diversification reduces both the upside and downside potential and allows for more consistent performance under a wide range of economic conditions.

Question 19

Dollar Cost Averaging

Answer 19

Buying a set dollar amount of a stock or mutual fund on a regular basis. Over time, the average cost will be bought when the price is low and fewer when the price is higher.

Question 20

Dow Jones

Answer 20

The most widely used indicator of the overall condition of the stock market. it is a price-weighted average of thirty actively traded blue chip stocks, primarily industrials.

Question 21

Equity Line

Answer 21

A method of borrowing in which a homeowner may borrow against home equity as needed using a checkbook or credit card. It differs from a standard loan in that the borrowing may be done over a period of time, preventing excess borrowing and limiting interest costs.

Question 22

Equity Loan

Answer 22

A loan secured by a primary residence or second home to the extent of the excess of fair market value over the debt incurred in the purchase.

Question 23

ETF

Answer 23

A mutual fund that tracks an index and is traded on a stock exchange.

Question 24

Expense Ratio

Answer 24

For a mutual fund, operating costs, including management fees, expressed as a percentage of the fund’s average net assets for a given time period.

Question 25

Financial Risk

Answer 25

The risk associated with any form of debt financing.

Question 26

Forbearance

Answer 26

A borrower may qualify for student loan forbearance if he or she has difficulty making loan payments on time. Granted at the discretion of the lender and documentation is required to prove economic hardship.

Question 27

Gross Income

Answer 27

An individual’s total income before subtracting taxes or deductions.

Question 28

Housing Debt

Answer 28

Mortgage principal + mortgage interest + property taxes + homeowner’s insurance.

Question 29

Inflation

Answer 29

The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.

Question 30

Insured

Answer 30

The person, group, or property for which an insurance policy is issued.

Question 31

Liability

Answer 31

An obligation that legally binds an individual or company to settle a debt.

Question 32

Management Risk

Answer 32

The risks associated with ineffective, destructive, or underperforming management, which hurts shareholders and the company being managed.

Question 33

Mature

Answer 33

To come due; to reach the time when the face value of a bond or CD must be paid.

Question 34

Mortgage

Answer 34

A loan to finance the purchase of real estate, usually with specified payment periods and interest rates. The borrower gives the lender a lien on the property as collateral for the loan.

Question 35

Lien

Answer 35

a right to keep possession of property belonging to another person until a debt owed by that person is discharged.

Question 36

Municipal Bond

Answer 36

A bond issued by a state, city, or local government. Municipalities issue bonds to raise capital for their day-to-day activities and for specific projects they might be undertaking.

Question 37

Mutual Fund

Answer 37

An open-ended fund operated by an investment company that raises money from shareholders and invests in a group of assets in accordance with a stated set of objectives.

Question 38

Net Worth

Answer 38

Net Worth= Total assets - Total liabilities

Question 39

Premium

Answer 39

The amount the insured must pay to keep their insurance policy in force. In return for the premium payment, the insurance company promises to cover the insured in case of an accident or loss.

Question 40

Principal

Answer 40

Face amount of a debt or mortgage on which interest is either owed or earned.

Question 41

Prospectus

Answer 41

A legal document offering securities or mutual fund shares for sale. It must explain the offer, including the terms, issuer, and objectives.

Question 42

Recession

Answer 42

A period of economic decline, specifically, a decline in Gross Domestic Product (GDP) for two or more consecutive quarters.

Question 43

S&P 1500

Answer 43

A stock market index of US stocks made by Standard & Poor’s. It includes all stocks in the S&P 500, S&P 400, S&P 600.

Question 44

Sector

Answer 44

A group of businesses in a particular segment of the economy that share similar characteristics.

Question 45

Stafford Loans

Answer 45

Federal student loans that are provided by the US government and carry a fixed interest rate.

Question 46

Subsidized Loans

Answer 46

Loans that the borrower does not have to pay interest on while they are still in school. Instead, a third party (usually the US government) pays interest while the borrower is in school, and interest does not start to accrue until after graduation.

Question 47

Ticker Symbol

Answer 47

The unique letters used to identify a stock or mutual fund.

Question 48

Treasury Bill

Answer 48

A debt obligation issued by the US Government and backed by its full faith and credit, having a maturity of one year or less. Treasury bills are exempt from state and local taxes.

Question 49

Treasury Bond

Answer 49

A debt obligation issued by the U.S. Government and backed by its full faith and credit, having a maturity of more than seven years. Treasury bonds are exempt from state and local taxes.

Question 50

Turnover

Answer 50

The amount of a mutual fund’s holdings that are changed over the course of a year through buying and selling.

Question 51

Unsubsized loans

Answer 51

loans where the interest starts to accrue immediately, even though payments aren’t due until six months after the student graduates. The fact that interest accrues while the borrower is still in school makes these loans less desirable than subsidized loans.