Glossary
Bonds
Interest-bearing assets representing a loan made by an investor to a borrower (typically a corporation or government), promising repayment of principal plus interest.
Example:
When you buy a U.S. Treasury bond, you are essentially lending money to the U.S. government in exchange for regular interest payments.
Credit Cards
A type of revolving loan where a bank pays for a cardholder's purchases, and the cardholder repays the bank later, often with interest if the balance isn't paid in full.
Example:
Using a credit card to buy groceries means the bank pays the store, and you owe the bank that amount, plus interest if you don't pay your bill on time.
Debit Cards
Payment cards that allow direct access to funds in a checking account (demand deposits) for purchases or cash withdrawals, without incurring interest.
Example:
When you use a debit card to pay for coffee, the money is immediately deducted from your bank account.
Debt Financing
A method of raising capital by borrowing money that must be repaid, typically with interest, such as through issuing bonds or taking out loans.
Example:
A company might use debt financing by issuing corporate bonds to fund a new factory, promising to pay back the bondholders over time.
Demand Deposits
Funds held in checking accounts that can be accessed by the account holder at any time, typically without prior notice to the bank.
Example:
The money in your checking account, which you can withdraw or spend instantly, is considered a demand deposit.
Equity Financing
A method of raising capital by selling ownership shares (stocks) in a company to investors, rather than borrowing money.
Example:
A startup might use equity financing by selling shares to venture capitalists to fund its initial growth without taking on debt.
Financial Assets
Things that hold monetary value and represent a claim to future payments or ownership, such as cash, stocks, and bonds.
Example:
When you save money in a bank account, you are holding a financial asset that represents a claim on the bank.
Inverse Relationship (Bond Prices & Interest Rates)
The principle that bond prices and market interest rates move in opposite directions; when one rises, the other falls.
Example:
If market interest rates suddenly increase, existing bonds with lower fixed interest payments become less attractive, causing their market prices to fall due to this inverse relationship.
Liquidity
The ease and speed with which an asset can be converted into cash without a significant loss in value.
Example:
Cash is considered highly liquid because it can be used immediately for purchases, unlike a house, which has low liquidity.
Loans
Agreements where a lender provides money to a borrower, who agrees to repay the amount borrowed, usually with interest, over a set period.
Example:
Taking out a student loan allows you to pay for college now, with the understanding that you will repay the bank after graduation.
Rate of Return
The net gain or loss on an investment over a specified period, typically expressed as a percentage of the initial investment.
Example:
If you invest 110 in a year, your rate of return is 10%.
Risk
The possibility that an investment's actual outcome will differ from the expected outcome, potentially resulting in a loss of principal or lower returns.
Example:
Investing in a volatile startup carries a higher risk compared to investing in a well-established, stable company.
Stocks
Securities that represent ownership shares in a company, giving the holder a claim on the company's assets and earnings.
Example:
Buying stocks in Apple means you own a tiny piece of the company and can potentially profit if its value increases.