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Financial Terms You Should Know


Glory Enyinnaya

There are certain terms which you have undoubtedly come across in your financial transactions. Here’s a quick run-down of the most common financial terms and their meanings.

Amortization:

Amortization is a repayment method in which the amount you borrow is repaid gradually though regular monthly payments of principal and interest over the term of the loan.

Annuity:

An annuity is a financial product sold by institutions said to grow money and make payments to individuals on a regular basis after it matures. This si something many people use to ensure they have money during retirement

Bad Bank:

A bad bank is an entity (the “bad bank”) that is legally separated from the bank that created it (the “good bank”) and into which are placed problem loans (or other troubled assets). They are usually created by banks to clean up their balance sheets.

Collateral:

Collateral is something of value that is pledged as security for a loan. The lender can repossess the collateral if the loan is not repaid.

Derivative Instruments:

These are investments that are valued by reference to the values of other investments. Examples include options and credit default swaps

Dividend:

A dividend is a payment, usually in cash, that a corporation makes to its stockholders. The dividend is the stockholders’ share of the profits left after the company sets aside funds to finance operations, expansion and modernization.

Hedge:

Hedging means to reduce one’s risk of loss by compensating transactions on the other side. For example, you want to buy goods for future delivery priced in a foreign currency. You can hedge by buying the foreign exchange needed at the rate then in effect.

Insolvent:

Insolvency is a condition where a person or a financial institution has liabilities that exceed its assets.

Mortgage:

A mortgage is a document signed by a borrower when a home loan is made that gives the lender a right to take possession of the property if the borrower fails to pay off the loan

Securitization:

Securitization is a process whereby a financial institution assembles pools of cash-flow-producing assets (such as loans) and then sells an interest in the cash flows as securities to investors

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Comments (2)

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