Introduction to Finance 1 Final Exam Study Guide

Net Income - The money a person has available after taxes and other deductions have been taken out of their paycheck

Gross Income - A person’s total income before taxes and other deductions

Balanced Budget - A budget in which the revenues and expenditures are equal (import/export are equal)

W-4 - A form that is filled by an employee to let employers know how much to withhold from the employee’s paycheck based on marital status, number of exemptions, and dependents

Checking Account - A liquid type of account with a bank or other financial institution that allows a person to deposit and withdraw money

Mutual Fund - An investment program funded by shareholders that has trades in diversified holdings and is managed professionally

Low Risk Investments:

  • Money market mutual fund - A fund where investments are made on short-term debt securities such as US treasury bills with the goal of creating a stable asset value through liquid investments
  • Treasury bond - A debt issued by the government to support government spending that pays back after a certain amount of time
  • Treasury note - A marketable US government debt security with a fixed interest rate and a maturity between 2 and 10 years
  • Treasury bill - A short-dated government security, yielding no interest but issued at a discount on its redemption price
  • Annuities - A fixed sum of money paid to someone each year, typically for the rest of their life or a form of insurance or investment entitling the investor to a series of annual sums

Medium Risk Investments - Crowdfunded real estate, fundraising, dividend-paying stocks, corporate bonds, municipal bonds, preferred stocks are all medium risk investments

High Risk Investments -

  • Junk Bonds - bonds that carry a higher risk of default than most bonds issued by corporations and governments
  • Speculative Bonds - describes securities deemed to not be of investment quality by a credit rating agency
  • Penny Stocks - a common stock valued at less than one dollar, and therefore highly speculative
  • Rule of 72 - a simplified formula that calculates how long it’ll take for an investment to double in value, based on its rate of return (t = 72/r, t = number of periods required to double an investment’s value, r = interest rate per period, as a percentage)

Depreciation - When something decreases in value over time

Appreciation - When something gains in value over time

Adjustable Rate Mortgage - an interest rate that may change periodically depending on changes in a corresponding financial index that’s associated with the loan

Fixed Rate Mortgage - an installment loan that has a fixed interest rate for the entire term of the loan

Amortization - a financial term that refers to your home loan pay off process

Dividend Income - a reward given to shareholders who have invested in a company’s equity, usually originating from the company’s net profits

Interest Income - Earnings generated by investments such as savings accounts and certificates of deposit

Benefits - a reduction in the cost of finance, including interest, finance charges, costs, fees and discounts on a redemption amount

Savings Account - a bank account that earns interest

Certificate of Deposit - a savings account that holds a fixed amount of money for a fixed period of time, such as six months, one year, or five years, and in exchange, the issuing bank pays interest

FDIC Insurance - a bank or thrift account that is covered or insured by the Federal Deposit Insurance Corporation (FDIC)

Simple Interest - the straightforward crediting of cash flows associated with some investment or deposit

Compound Interest - that the interest associated with a bank account, loan, or investment increases exponentially over time

Bond - a fixed-income instrument that represents a loan made by an investor to a borrower

Dividend - the distribution of a company’s earnings to its shareholders and is determined by the company’s board of directors

Index - a group or basket of securities, derivatives, or other financial instruments that represents and measures the performance of a specific market, asset class, market sector, or investment strategy

Market Price - the current price at which an asset or service can be bought or sold

Rate of return - the percentage change in the value of an investment

Credit limit - the maximum amount of money a lender will allow you to spend on a credit card or a line of credit

MSRP - the price that the manufacturer suggests that the dealer ask for the vehicle

Invoice Price - the initial price that the manufacturer charges the dealer

Down payment - an initial payment made when something is bought on credit.

Leasing - contract outlining the terms under which one party agrees to rent an asset owned by another party

Renters insurance - property insurance that provides coverage for a policyholder’s belongings, liabilities, and possibly living expenses in case of a loss event

Security deposit - money that is given to a landlord, lender, or seller of a home or apartment as proof of intent to move in and care for the domicile