Finance definitions

124 finance terms from Achievable exam prep courses, each defined in plain language with links into the course textbook.

• 11-bond indexThe 11-bond index is a benchmark published by The Bond Buyer that tracks the average yield of 11 high-grade general obligation municipal bonds with 20-year maturities. It gauges borrowing costs for top-quality municipal issuers.
• 529 planA 529 plan is a state-sponsored, tax-advantaged account for education savings. Contributions grow tax-deferred, and withdrawals are tax-free at the federal level when used for qualified education expenses.
• Absorption vs. variable costingAbsorption costing and variable costing are two methods of valuing inventory that differ in how they treat fixed manufacturing overhead. Absorption costing includes it in product cost, while variable costing expenses it in the period incurred.
• Access equals delivery ruleThe access equals delivery rule lets an issuer or broker-dealer satisfy prospectus delivery requirements by filing the final prospectus with the SEC's EDGAR system instead of mailing a paper copy. Because the document is publicly available online, investors are considered to have received it.
• Accounting equationThe accounting equation states that assets = liabilities + equity. It is the foundation of double-entry bookkeeping: everything a business owns is financed either by what it owes to others or by its owners' investment.
• Accounts receivableAccounts receivable is the money customers owe a company for goods or services delivered on credit but not yet paid for. It appears on the balance sheet as a current asset because it is expected to convert to cash within a year.
• Accretion vs. amortizationAccretion and amortization are opposite cost basis adjustments for bonds. Accretion gradually increases the cost basis of a bond bought at a discount, while amortization gradually decreases the cost basis of a bond bought at a premium, moving both toward par by maturity.
• Accruals and prepaymentsAccruals and prepayments are period-end adjustments that match income and expenses to the period they relate to. An accrual records an expense incurred but not yet paid, while a prepayment records a payment made for a future period's expense.
• Accrued expensesAccrued expenses are costs a business has incurred during an accounting period but has not yet paid or been billed for. They are recorded as a current liability so the expense appears in the period it relates to.
• Accrued incomeAccrued income is income a business has earned during an accounting period but has not yet received or invoiced by the period's end. Under accrual accounting it is recognized as revenue and recorded as a current asset.
• Accrued interestAccrued interest is the interest a bond has earned since its last coupon payment but that has not yet been paid. When a bond trades between coupon dates, the buyer pays the seller the accrued interest on top of the bond's price.
• Activity-based costing (ABC)Activity-based costing (ABC) is a method of assigning overhead costs to products based on the activities each product actually consumes. It replaces a single plantwide overhead rate with multiple cost pools, each allocated using its own cost driver.
• Adjustable rate preferred stockAdjustable rate preferred stock is preferred stock whose dividend rate resets periodically based on a benchmark interest rate, such as the Treasury bill rate. The floating dividend keeps its market price more stable than fixed-rate preferred stock.
• Agency CMOAn agency CMO is a collateralized mortgage obligation built from mortgage-backed securities issued or guaranteed by GNMA, FNMA, or FHLMC. The agency guarantee greatly reduces credit risk — only GNMA carries the government's full faith and credit — but the tranches still carry prepayment and extension risk.
• Agency vs. principal capacityAgency and principal capacity describe the two ways a firm can execute a customer's trade: as an agent (broker) matching the customer with another party for a commission, or as a principal (dealer) trading from its own inventory for a markup or markdown.
• Aggregate demandAggregate demand is the total quantity of goods and services demanded across an entire economy at each price level. It is the sum of consumption, investment, government spending, and net exports (AD = C + I + G + NX).
• Aggregate supplyAggregate supply is the total quantity of goods and services that producers in an economy are willing and able to supply at each price level. It is modeled with a short-run curve that slopes upward and a long-run curve that is vertical at full employment.
• Alpha and betaBeta measures how much an investment moves relative to the overall market, while alpha measures the return an investment earned above or below what its beta predicted. Beta describes risk; alpha describes performance after adjusting for that risk.
• American depositary receipt (ADR)An American depositary receipt (ADR) is a certificate issued by a U.S. bank that represents shares of a foreign company, allowing the stock to trade on U.S. markets in U.S. dollars.
• AmortizationAmortization is the gradual reduction of an amount over time — either spreading the cost of an intangible asset across its useful life, or paying down a loan's principal through scheduled payments.
• Annualized returnAnnualized return converts an investment's performance over any time period into the equivalent yearly rate, making returns earned over different horizons directly comparable.
• Anti-money laundering (AML)Anti-money laundering (AML) refers to the laws, regulations, and firm procedures designed to stop criminals from disguising illegally obtained funds as legitimate income. In the U.S., the Bank Secrecy Act is the foundation of AML compliance.
• Anticipation notes (TAN, BAN, GAN)Anticipation notes are short-term municipal securities issued to cover temporary cash needs until an expected source of money arrives — taxes (TANs), bond proceeds (BANs), grants (GANs), or revenues (RANs).
• AON vs. FOK ordersAn all-or-none (AON) order must be filled in its entirety but can stay open until it is, while a fill-or-kill (FOK) order must be filled in its entirety immediately or it is cancelled. Both forbid partial fills; only FOK adds the immediacy requirement.
• Assessable stockAssessable stock is stock that can require its holder to pay additional money to the issuer beyond the original purchase price. Nearly all stock issued today is non-assessable, but the concept remains a tested point under the Uniform Securities Act.
• Assumed interest rate (AIR)The assumed interest rate (AIR) is the benchmark rate of return used to set the initial payment on a variable annuity and to adjust each payment thereafter. Separate account performance above the AIR raises the next payment, while performance below it lowers the payment.
• Available-for-sale securitiesAvailable-for-sale (AFS) securities are debt investments a company holds without intending to trade them actively or hold them to maturity. They are reported at fair value, with unrealized gains and losses recorded in other comprehensive income rather than net income.
• Balance of paymentsThe balance of payments is a record of all economic transactions between one country's residents and the rest of the world over a period. It is divided into the current account, which tracks trade in goods and services, and the capital and financial accounts, which track investment flows.
• Balanced scorecardA balanced scorecard is a performance management framework that measures an organization from four perspectives — financial, customer, internal business processes, and learning and growth — rather than by financial results alone.
• Bank reconciliationA bank reconciliation is the process of comparing a company's cash book balance to its bank statement balance and explaining every difference between them, such as outstanding checks, uncleared deposits, bank charges, and errors.
• Banker's acceptanceA banker's acceptance is a short-term time draft guaranteed by a bank, used mainly to finance international trade. It trades at a discount to face value in the money market and matures in 270 days or less.
• Bid and askThe bid is the highest price a buyer is willing to pay for a security, and the ask (or offer) is the lowest price a seller will accept. The difference between them is the bid-ask spread.
• Board of directorsA board of directors is the group of individuals elected by a corporation's shareholders to oversee management and represent shareholder interests. The board sets strategy, hires and monitors executives, and declares dividends.
• Bond durationBond duration measures how sensitive a bond's price is to a change in interest rates, expressed as a weighted average of the time until the bond's cash flows are received. The longer a bond's duration, the more its price will move when rates change.
• Bond quotesBond quotes express a bond's price as a percentage of its par value rather than in dollars. A corporate bond quoted at 98½ is trading at 98.5% of its $1,000 par, or $985.
• Bond ratingsBond ratings are letter grades assigned by credit rating agencies that measure a bond issuer's ability to make interest and principal payments on time. They classify bonds by default risk, from the highest investment grade down to speculative junk status.
• Books of prime entryBooks of prime entry are the day books where a business first records transactions, grouped by type, before they are posted to the general ledger. Examples include the sales day book, purchases day book, cash book, and the journal.
• Break-even analysisBreak-even analysis determines the sales volume at which total revenue exactly equals total cost, so profit is zero. It separates costs into fixed and variable components and shows how many units must be sold before a project or product starts earning.
• Broker-dealerA broker-dealer is a firm that buys and sells securities for customers (as a broker) or for its own account (as a dealer). Most brokerage firms act in both capacities, which is why the two roles share one label.
• Brokerage account statementsBrokerage account statements are the periodic reports firms send customers showing their positions, balances, and account activity. Firms must send statements at least quarterly, and most send them monthly in any month with activity.
• Business continuity planA business continuity plan (BCP) is a written procedure describing how a firm will keep serving customers and protect their assets during a significant business disruption. Broker-dealers and investment advisers are required to maintain one and update it as their business changes.
• Business cycleThe business cycle is the recurring pattern of expansion and contraction in a nation's overall economic activity. It moves through four phases — expansion, peak, contraction, and trough — measured largely by changes in real GDP, employment, and output.
• Business development company (BDC)A business development company (BDC) is a publicly traded investment company that lends to and invests in small and mid-sized private businesses. BDCs give everyday investors access to private-market returns through shares traded on an exchange.
• Butterfly spreadA butterfly spread is a four-option strategy built from three equally spaced strike prices, combining a bull spread with a bear spread. It has limited risk and limited reward, and pays off best when the underlying settles at the middle strike.
• Call premiumA call premium is the extra amount above par value that an issuer pays bondholders when it redeems a callable bond before maturity. It compensates investors for losing the remaining interest payments they expected to collect.
• Call protectionCall protection is a period after issuance during which the issuer of a bond or preferred stock is barred from redeeming (calling) the security. It guarantees investors a stretch of time when their income stream cannot be taken away early.
• Call spreadA call spread is an options strategy that combines buying one call and selling another call on the same stock with the same expiration but different strike prices. It caps both the maximum gain and the maximum loss.
• Callable preferred stockCallable preferred stock is preferred stock the issuing company can buy back from investors at a preset call price after a specified date, typically when interest rates have fallen.
• Capital budgetA capital budget is a plan for a company's long-term investments in assets such as equipment, facilities, and technology. It identifies which large projects to fund, when to fund them, and how the spending will be financed.
• Capital gains and lossesA capital gain is the profit realized when an investment is sold for more than its cost basis, and a capital loss is the shortfall when it sells for less. Gains held longer than one year are taxed at lower long-term rates than short-term gains.
• Capital market theoryCapital market theory is a framework for explaining how risk and expected return are related in the securities markets. It builds on modern portfolio theory and includes concepts like the capital asset pricing model (CAPM), beta, and the efficient frontier.
• Capital structureCapital structure is the mix of debt and equity a company uses to fund its assets and operations. The balance between borrowed money and owners' capital determines a firm's financing cost, its financial risk, and the order in which claims are paid.
• Cash accountA cash account is a brokerage account in which the customer must pay in full for every purchase, with no borrowing from the firm. It is the default account type and the opposite of a margin account.
• Cash dividendA cash dividend is a distribution of a company's earnings paid to shareholders in cash, typically quarterly. Each stockholder receives a proportional payment based on the number of shares they own.
• Cash management billA cash management bill (CMB) is a very short-term security the U.S. Treasury issues on an as-needed basis to cover temporary gaps in the government's cash flow. Like Treasury bills, CMBs are sold at a discount and mature at face value.
• Certificate of deposit (CD)A certificate of deposit is a bank deposit that pays a fixed interest rate in exchange for leaving the money untouched until a set maturity date. Withdraw early and the bank charges a penalty, usually a forfeit of some of the interest earned.
• Chicago Board Options Exchange (CBOE)The Chicago Board Options Exchange (CBOE) is the largest U.S. options exchange and the first marketplace created specifically for trading listed options. It standardizes options contracts and provides a central, regulated market where they can be bought and sold.
• Circular flow modelThe circular flow model is a diagram showing how money, goods, and resources move between households and firms in an economy. It illustrates why total spending, total income, and total output in an economy are always equal.
• Class B sharesClass B shares are mutual fund shares sold without a front-end sales charge but subject to a contingent deferred sales charge if you redeem within a set number of years. They are also known as back-end load shares.
• Class C sharesClass C shares are a mutual fund share class with no front-end sales charge but a higher ongoing 12b-1 fee, often called a level load. They typically suit investors with shorter time horizons.
• Closed-end fundA closed-end fund is an investment company that raises capital once through an IPO, issuing a fixed number of shares that then trade on an exchange. Unlike mutual funds, its shares are bought and sold between investors at market prices that can differ from NAV.
• Closing sale (options)A closing sale is an options order that sells a contract the investor already owns, exiting an existing long position. It is one of the four options transaction types, alongside opening purchases, opening sales, and closing purchases.
• Collar (options)A collar is an options strategy in which an investor who owns stock buys a protective put and sells a covered call at the same time. The put sets a floor under the position while the call caps its upside, and the call premium helps pay for the put.
• Collateral trust certificateA collateral trust certificate is a secured corporate bond backed by securities — typically stocks or bonds of another company — that the issuer deposits with a trustee as collateral for the bondholders.
• Collateralized mortgage obligation (CMO)A collateralized mortgage obligation (CMO) is a mortgage-backed security that pools home loans and divides the resulting cash flows into separate classes, called tranches, each with its own maturity and prepayment profile.
• Commercial paperCommercial paper is short-term, unsecured corporate debt issued to cover near-term obligations like payroll and inventory. It has a maximum maturity of 270 days, is typically sold at a discount, and is exempt from SEC registration when it also meets the Securities Act's other conditions — chiefly that the proceeds fund a current transaction.
• Common stockCommon stock is a security that represents ownership in a corporation. Common stockholders can vote on corporate matters and may receive dividends, but they are last in line for assets if the company liquidates.
• Consolidated financial statementsConsolidated financial statements combine the results of a parent company and the subsidiaries it controls into a single set of statements, presented as if the group were one economic entity. Intercompany transactions and balances are eliminated so nothing is counted twice.
• Contract assets and contract liabilitiesA contract asset is a company's right to payment for goods or services it has already transferred, when that right depends on something more than the passage of time. A contract liability is the obligation to transfer goods or services for which the company has already been paid.
• Contribution marginContribution margin is sales revenue minus variable costs. It shows how much of each sales dollar is left over to cover fixed costs and, once those are covered, to become profit.
• Control stockControl stock is stock owned by an affiliate of the issuer — an officer, director, or shareholder controlling more than 10% of the company's voting shares. Sales of control stock are subject to the volume limits of SEC Rule 144.
• Conversion ratioThe conversion ratio is the number of common shares an investor receives when converting a convertible bond or convertible preferred stock. It equals the security's par value divided by its conversion price.
• Convertible bondA convertible bond is a corporate bond that the holder can exchange for a fixed number of the issuer's common shares. It pays interest like a normal bond but also lets the investor participate if the company's stock rises.
• Convertible preferred stockConvertible preferred stock is preferred stock that can be exchanged for a fixed number of the issuer's common shares. It pays a fixed dividend while giving the holder a way to participate if the common stock rises.
• Cooling-off periodThe cooling-off period is the waiting time between the day an issuer files a registration statement with the SEC and the day the offering becomes effective. It lasts a minimum of 20 days, during which the securities may be marketed but not sold.
• Corporate actionA corporate action is an event initiated by a company that affects its outstanding securities or shareholders, such as a dividend, stock split, merger, tender offer, or rights offering. Actions may be mandatory or voluntary.
• Corporate debtCorporate debt is money borrowed by corporations through securities like bonds, debentures, and commercial paper. Investors who buy corporate debt lend money to the issuer in exchange for interest payments and repayment of principal.
• Corporate governanceCorporate governance is the system of rules, structures, and processes by which a company is directed and controlled. It defines how power and accountability are shared among shareholders, the board of directors, and management.
• Corporate securitiesCorporate securities are the investment instruments a corporation issues to raise capital, including equity securities such as common and preferred stock and debt securities such as bonds, debentures, and commercial paper. Investors buy them for growth, income, or both.
• COSO frameworkThe COSO framework is the most widely used model for designing and evaluating internal control, published by the Committee of Sponsoring Organizations of the Treadway Commission. It organizes internal control into five integrated components supporting operations, reporting, and compliance objectives.
• Cost basisCost basis is the original value of an investment for tax purposes, typically the purchase price plus commissions. It is subtracted from the sale proceeds to determine the capital gain or loss when the investment is sold.
• Coterminous debtCoterminous debt is municipal debt issued by two or more governmental units whose boundaries are identical. Because the same taxpayers back both issues, analysts add the debt together when evaluating a municipality's total obligation.
• Covered call taxationCovered call taxation refers to the tax rules applied when an investor sells call options against stock they own. The premium received is not taxed until the option expires, is closed out, or is exercised, and the outcome determines whether it becomes a short-term gain or an adjustment to the stock sale.
• Cumulative preferred stockCumulative preferred stock is preferred stock whose missed dividends accumulate as arrears. The company must pay all skipped preferred dividends before it can pay any dividend to common shareholders.
• Currency optionsCurrency options are option contracts that give the holder the right to buy or sell a foreign currency at a set exchange rate before expiration. Businesses and investors use them to hedge or speculate on exchange-rate movements.
• Currency transaction report (CTR)A currency transaction report (CTR) is a form that a financial institution must file with FinCEN whenever a customer conducts more than $10,000 in cash transactions in a single business day. It is a routine anti-money-laundering filing, not an accusation of wrongdoing.
• Current and quick ratiosThe current and quick ratios are liquidity measures that compare a company's short-term assets to its short-term liabilities. The current ratio uses all current assets, while the quick ratio strips out inventory for a stricter test.
• Current yieldCurrent yield is a bond's annual interest payment divided by its current market price. It measures the income an investor earns relative to what the bond costs today, not its face value.
• Custodial accountA custodial account is an investment account an adult manages on behalf of a minor. The assets legally belong to the minor, but the custodian makes all investment decisions until the minor reaches the age of majority.
• De minimis exemption (investment advisers)The de minimis exemption allows an investment adviser with no place of business in a state and only a handful of clients there to avoid registering in that state. Under the Uniform Securities Act, the limit is five or fewer non-institutional clients in a 12-month period.
• DebentureA debenture is an unsecured corporate bond backed only by the issuer's general creditworthiness and promise to pay, rather than by specific collateral. Investors rely on the company's overall financial strength for repayment.
• Deferred incomeDeferred income is money a business has received from customers before delivering the goods or services. Because the revenue has not yet been earned, it is recorded as a liability until the company fulfills its obligation.
• DepreciationDepreciation is the systematic allocation of a tangible asset's cost over its useful life. Rather than expensing a machine or building all at once, a business records a portion of the cost as an expense each period the asset helps generate revenue.
• Derivative (finance)A derivative is a financial contract whose value is derived from the price of an underlying asset, such as a stock, bond, commodity, currency, or index. Common derivatives include options, futures, forwards, and swaps.
• Designated market maker (DMM)A designated market maker (DMM) is a firm on the New York Stock Exchange responsible for maintaining a fair and orderly market in its assigned stocks. DMMs quote continuous two-sided markets and manage the opening and closing auctions.
• Digital assetsDigital assets are assets that exist in electronic form and are recorded on a distributed ledger, such as cryptocurrencies, stablecoins, and non-fungible tokens (NFTs). They can be transferred, traded, or held as investments.
• Direct participation program (DPP)A direct participation program (DPP) is a pooled investment, typically structured as a limited partnership, that passes its income, gains, losses, and tax benefits directly through to investors instead of being taxed at the entity level.
• Discount rateThe discount rate is the interest rate the Federal Reserve charges banks for direct loans from its discount window. In valuation, the same term means the rate used to discount future cash flows to their present value.
• Discounted cash flow (DCF)Discounted cash flow is a valuation method that estimates what an investment is worth today by projecting the cash it will pay out and discounting each payment back to the present. The sum of those present values is the investment's intrinsic value.
• Discretionary authorityDiscretionary authority is written permission from a customer allowing a financial professional to place trades in the customer's account without asking approval for each order. An account operating this way is called a discretionary account.
• Dividend growth modelThe dividend growth model values a stock as the present value of its future dividends, assuming those dividends grow at a constant rate. Its formula is value = next year's dividend ÷ (required return − growth rate).
• Dividend tax rateThe dividend tax rate depends on whether a dividend is qualified or nonqualified. Qualified dividends are taxed at the lower long-term capital gains rates, while nonqualified (ordinary) dividends are taxed as ordinary income.
• Double-entry bookkeepingDouble-entry bookkeeping is a system in which every transaction is recorded in at least two accounts — a debit in one and an equal credit in another. It keeps the accounting equation in balance and provides a built-in check on recording errors.
• DVP and RVP accountsDVP and RVP accounts are institutional brokerage accounts that settle trades on a cash-on-delivery basis: in a DVP account payment is made when securities are delivered, while in an RVP account securities are delivered only when payment is received.
• Earnings per share (EPS)Earnings per share (EPS) is a company's profit available to common shareholders divided by its outstanding common shares. The formula is EPS = (net income − preferred dividends) ÷ outstanding common shares.
• Efficient market hypothesis (EMH)The efficient market hypothesis (EMH) is the theory that security prices already reflect all available information, making it impossible to consistently beat the market through stock picking or market timing.
• Elasticity of demandElasticity of demand measures how much the quantity demanded of a good changes when its price changes. Demand is elastic when buyers cut back sharply in response to a price increase, and inelastic when they keep buying roughly the same amount.
• Employee stock optionsEmployee stock options are rights granted by a company to its employees to buy the employer's stock at a fixed price for a set period. They are a form of compensation designed to align employee and shareholder interests.
• Equipment trust certificateAn equipment trust certificate is a secured corporate bond backed by specific physical equipment, such as airplanes or railroad cars. A trustee holds title to the equipment until the debt is fully repaid.
• ERISAERISA is the Employee Retirement Income Security Act of 1974, the federal law that sets minimum standards for private-sector retirement and benefit plans, including participation, vesting, funding, fiduciary conduct, and disclosure requirements.
• ERISA 1,000-hour ruleThe ERISA 1,000-hour rule requires employers to let employees participate in a qualified retirement plan once they work at least 1,000 hours in a 12-month period, extending eligibility to many part-time workers.
• Eurodollar bondsEurodollar bonds are bonds denominated in US dollars but issued and sold outside the United States. They pay interest and principal in dollars, and they can avoid SEC registration when the offering satisfies Regulation S — meaning it takes place in an offshore transaction with no directed selling efforts in the US.
• Eurodollar certificate of depositA Eurodollar certificate of deposit is a US dollar-denominated CD issued by a bank located outside the United States, often a foreign branch of a US bank. It pays interest and principal in dollars but sits outside the US banking system.
• Exchange privilegeAn exchange privilege lets a mutual fund investor swap shares of one fund for shares of another fund in the same fund family at net asset value, without paying a new sales charge.
• Exchange rateAn exchange rate is the price of one country's currency expressed in terms of another currency. Exchange rates determine what imports, exports, foreign investments, and international payments cost in domestic terms.
• Exchange-traded fund (ETF)An exchange-traded fund (ETF) is a pooled investment fund whose shares trade on stock exchanges throughout the day like a stock, typically tracking an index at low cost.
• Exchange-traded note (ETN)An exchange-traded note (ETN) is an unsecured debt security, typically issued by a bank, whose return is linked to the performance of a market index. Unlike an ETF, an ETN holds no underlying assets, so investors bear the issuer's credit risk.
• Exempt securitiesExempt securities are securities that do not have to be registered with regulators before being sold. Common examples include U.S. government securities, municipal bonds, and securities issued by banks — though antifraud rules still apply to all of them.
• Exempt transactionAn exempt transaction is a securities trade that does not require state registration of the security because of how the transaction occurs — for example, an unsolicited order, a private placement, or a sale to an institutional investor.
• Exemption (securities)An exemption in securities law excuses a security, transaction, or person from registration requirements that would otherwise apply. Exempt parties still fall under the law's antifraud provisions — they are excused from registration, not from the law itself.
• Face-amount certificate companyA face-amount certificate company is one of the three types of investment companies defined by the Investment Company Act of 1940. It issues debt certificates that promise to pay investors a fixed sum — the face amount — at a stated maturity date.
• Factoring of accounts receivableFactoring is the sale of a company's accounts receivable to a third party, called a factor, at a discount. The company receives cash immediately instead of waiting for customers to pay, and the factor earns the difference when it collects the receivables.
• Impairment of assetsImpairment of assets occurs when an asset's carrying value on the balance sheet exceeds the amount the company can recover through use or sale. The company must write the asset down and recognize an impairment loss on the income statement.
• Types of brokerage accountsBrokerage account types are the registration categories investors choose when opening an account with a broker-dealer, such as cash, margin, individual, joint, retirement, and custodial accounts. The registration determines ownership, tax treatment, and what activities the account allows.