Glossary

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Terms	Definitions
aggregate	Any total (e.g., the gross national product; the sum of monthly sales).
amortization	The process of fully paying off indebtedness by installments of principal and earned interest over a definite time.
annual percentage rate - APR	The cost of credit on a yearly basis expressed as a percentage.
annual percentage yield - APY	The effective, or true, annual rate of return. The APY is the rate actually earned or paid in one year, taking into account the effect of compounding. The APY is calculated by taking one plus the periodic rate and raising it to the number of periods in a year.
automated clearinghouse - ACH	Electronic clearing and settlement system for exchanging electronic transactions among participating depository institutions; such electronic transactions are substitutes for paper checks and are typically used to make recurring payments such as payroll or loan payments. The Federal Reserve Banks operate an automated clearinghouse, as do some private-sector firms.
automated teller machines - ATM	Computer-controlled terminals located on the premises of financial institutions or elsewhere, through which customers may make deposits, withdrawals, or other transactions as they would through a bank teller. Groups of banks sometimes share ATM networks located throughout a region of the country that may include portions of several states.
automatic transfer service account - ATS	A depositor's savings account from which funds may be transferred automatically to the same depositor's checking account to cover a check written or to maintain a minimum balance.
availability float	Checks deposited by a company that have not yet been cleared.
balloon payment	A large payment that may be charged at the end of a loan or lease.
bank holding company - BHC	Company that owns, or has controlling interest in, one or more banks. A company that owns more than one bank is known as a multibank holding company. A bank holding company may also own another bank holding company, which in turn owns or controls a bank; the company at the top of the ownership chain is called the top holder. The Board of Governors is responsible for regulating and supervising bank holding companies, even if the bank owned by the holding company is under the primary supervision of a different federal agency (the Comptroller of the Currency or the Federal Deposit Insurance Corporation).
bank note	A term used synonymously with paper money or currency issued by a bank. Notes are, in effect, a promise to pay the bearer on demand the amount stated on the face of the note. Today, only the Federal Reserve Banks are authorized to issue bank notes, i.e. Federal Reserve notes, in the United States.
bank regulation	The formulation and issuance by authorized agencies of specific rules or regulations, under governing law, for the conduct and structure of banking.
banking delay	Time required for processing and clearing a check through the banking system.
bankwire	An electronic communications network owned by an association of banks and used to transfer messages between subscribing banks.
bill	A short-term direct obligation of the U.S. Treasury (13, 26, or 52 weeks' maturity).
bond	A long-term obligation of the U.S. Treasury (more than 10 years maturity).
broker-dealer	Any person, other than a bank, engaged in the business of buying or selling securities on her or his own behalf for others.
buydown	A lump sum payment made to the creditor by the borrower or by a third party to reduce the amount of some or all of the consumer's periodic payments to repay the indebtness.
capacity utilization rate	The percentage of the economy's total plant and equipment that is currently in production. Usually a decrease in this percentage signals an economic slowdown, while an increase signals economic expansion.
capital market	The market in which corporate equity and longer-term debt securities (those maturing in more than one year) are issued and traded.
cash method of accounting	A system, used especially in computing income tax, in which income is not credited until it is actually or constructively received and expenses are not charged until they have been paid; to be distinguished from the accrual method, in which income is credited when the legal right to the income occurs and expenses are charged when the legal liability becomes enforceable.
cashier's check	A check written by a financial institution on its own account, signed by a representative of a financial institution, and then payable to the third party. The purchaser of the check, called a remitter, pays the full face price of the check together with a small premium.
certificate of deposit - CD	A form of time deposit at a bank or savings institution which cannot be withdrawn before a specified maturity date without being subject to an interest penalty for early withdrawal. Small-denomination CDs are often purchased by individuals. Large CDs of $100,000 or more are often in negotiable form, meaning they can be sold or transferred among holders before maturity.
check clearing	The movement of checks from the banks or other depository institutions where they are deposited back to those on which they are written, and funds movement in the opposite direction. This process results in credits to accounts at the institutions of deposit and corresponding debits to accounts at the paying institutions. The Federal Reserve participates in check clearing through its nationwide facilities, though many checks are cleared by private sector arrangement.
clearinghouse	An institution where mutual claims are settled between accounts of member depository institutions. Clearinghouses among banks have traditionally been organized for check-clearing purposes, but more recently have cleared other types of settlements, including electronic fund transfers.
closed-end credit	An agreement in which advanced credit, plus any finance charges, are expected to be repaid in full over a definite time. Most real estate and automobile loans are closed-end agreements.
collateral	Property that is offered to secure a loan or other credit and that becomes subject to seizure on default.
commercial bank	Bank that offers a broad range of deposit accounts, including checking, savings, and time deposits, and extends loans to individuals and businesses. Commercial banks can be contrasted with investment banking firms, such as brokerage firms, which generally are involved in arranging for the sale of corporate or municipal securities.
community reinvestment act - CRA	Enacted by Congress in 1977, the CRA encourages banks to help meet the credit needs of their communities for housing and other purposes, particularly in neighborhoods with low or moderate incomes, while maintaining safe and sound operations.
consumer price index - CPI	A measurement of the cost of living determined by the Bureau of Labor Statistics.
correspondent bank	A bank that accepts deposits of and performs banking services for other depository institutions.
cosigner	A term referring to a person, other than the principle borrower, who signs for a loan. The cosigner(s) assumes equal liability for the loan.
credit	The promise to pay in the future in order to buy or borrow in the present. The right to defer payment of debt.
credit card	Any card that may be used repeatedly to borrow money or buy goods and services on credit.
credit history	A record of how a person has borrowed and repaid debt.
credit scoring system	A statistical system used to determine whether or not to grant credit by assigning numerical scores to various characteristics related to creditworthiness.
creditworthiness	A creditor's measure of a consumer's past and future ability and willingness to repay debts.
debit card	A card that resembles a credit card but which debits a transaction account (checking account) with the transfers occurring at the same time with the customer's purchases. A debit card may be machine readable, allowing for the activation of an automated teller machine or other automated payments equipment.
default	Failure to meet the terms of a credit agreement.
deficit	The amount by which spending is greater than income.
demand deposit	A deposit that may be withdrawn at any time without prior written notice to the depository institution. A checking account is the most common form of demand deposit.
depository institution	A financial institution that obtains its funds mainly through deposits from the public. This includes commercial banks, savings and loan associations, savings banks, and credit unions. Although historically they have specialized in certain types of credit, the powers of nonbank depository institutions have been broadened in recent years. For example, NOW accounts, credit union share drafts, and other services similar to checking accounts may be offered by thrift institutions.
direct deposit	A method of payment which electronically credits your checking or savings account.
discount rate	Interest rate at which an eligible depository institution may borrow funds, typically for a short period, directly from a Federal Reserve Bank. The law requires that the board of directors of each Reserve Bank establish the discount rate every fourteen days subject to the approval of the Board of Governors.
durable merchandise	Goods that have a relatively lengthy life (television sets, radios, etc.).
economic growth	An increase in the nation's capacity to produce goods and services.
electronic funds transfer - EFT	Transfer of funds electronically rather than by check or cash. The Federal Reserve's Fedwire and automated clearinghouse services are EFT systems.
employment rate	The percentage of the labor force that is employed. The employment rate is one of the economic indicators that economists examine to help understand the state of the economy.
exchange rate	The price of a country's currency in terms of another country's currency.
expected rate of inflation	The public's expectations for inflation. These expectations determine how large an effect a given policy action by the Fed will have on economic activity.
Federal Deposit Insurance Corporation - FDIC	An independent deposit insurance agency created by Congress in 1933 to maintain stability and public confidence in the nation's banking system. The FDIC promotes safety and soundness of insured depository institutions and the U.S. financial system by identifying monitoring, and addressing risks to the deposit insurance funds; minimizes disruptive effects from the failure of banks and savings associations; and ensures fairness in the sale of financial products and provision of financial services.
federal funds	Short-term transactions in immediately available funds between depository institutions and certain other institutions that maintain accounts with the Federal Reserve; usually not collateralized.
federal funds rate	The interest rate at which banks borrow surplus reserves and other immediately available funds. The federal funds rate is the shortest short-term interest rate, with maturities on federal funds concentrated in overnight or one-day transactions.
federal reserve act of 1913	Federal legislation that established the Federal Reserve System.
federal reserve bank - FRB	One of the twelve operating arms of the Federal Reserve System, located throughout the nation, that together with their twenty-five branches carry out various System functions, including operating a nationwide payments system, distributing the nation's currency and coin, supervising and regulating member banks and bank holding companies, and serving as banker for the U.S. Treasury.
federal reserve notes	Nearly all of the nation's circulating paper currency consists of Federal Reserve notes printed by the Bureau of Engraving and Printing and issued to the Federal Reserve Banks to put into circulation through commercial banks and other depository institutions. Federal Reserve notes are obligations of the U.S. government.
federal reserve system	The central bank of the United States, created by Congress and made up of a seven-member Board of Governors in Washington, DC, twelve regional Federal Reserve Banks, and their twenty-five Branches.
finance charge	The total dollar amount paid to obtain credit.
financial institution	An institution that uses its funds chiefly to purchase financial assets (loans, securities) as opposed to tangible property. Financial institutions can be classified according to the nature of the principal claims they issue.
financial instrument	Any written instrument having monetary value or evidencing a monetary transaction.
fixed rate	A traditional approach to determining the finance charge payable on an extension of credit. A predetermined and certain rate of interest is applied to the principal.
graduated payment	Repayment terms calling for gradual increases in the payments on a closed-end obligation. A graduated payment loan usually involves negative amortization.
interest payments	The return expressed in percentages earned on an investment each year. These payments are issued every six months based on an annual rate.
issue date	The date when a refund payment is issued on a Treasury Security representing the difference between the investment amount and the purchase price, as determined at auction.
liquidity	(1) The ability of a bank or business to meet its current obligations; (2) the quality that makes an asset quickly and readily convertible into cash.
long-term interest rates	Interest rates on loan contracts--or debt instruments such as Treasury bonds or utility, industrial, or municipal bonds--having maturities greater than one year. Often called capital market rates.
market interest rates	Rates of interest paid on deposits and other investments, determined by the interaction of the supply of and demand for funds in financial markets.
money order	A financial instrument backed by a deposit at a certain firm such as a bank that can be easily converted into cash.
negative amortization	An increase in the principal of a loan, when the loan payments are insufficient to pay the interest due. The unpaid interest is added to the outstanding loan balance causing the principal to increase rather than decrease as payments are made. This situation typically occurs in an adjustable mortgage with an annual cap limiting any increases in the interest rate, and also in a graduated payment mortgage, which has low initial payments so moderate-income borrowers can afford to make the loan payments.
Negotiable Order of Withdrawal account - NOW	An interest earning account on which checks may be drawn. Withdrawals from NOW accounts may be offered by commercial banks, mutual savings banks, and savings and loan associations and may be owned only by individuals and certain nonprofit organizations and governmental units.
nominal interest rates	Current stated rates of interest paid or earned.
note	A medium-term obligation of the U.S. Treasury; 2-10 years maturity.
open-end credit	A line of credit that may be used repeatedly up to a certain limit. (Also called a charge account or revolving credit.)
open-end lease	A lease that may involve a balloon payment based on the value of the property when it is returned.
overdraft checking account	A checking account associated with a line of credit that allows a person to write checks for more than the actual balance in the account, generally with a finance charge on the overdraft.
points	In reference to a loan, points consist of a lump sum payment made by the borrower at the outset of the loan period. Generally, each point equals one percent of the loan amount.
principal payments	The face amount or par value of a debt instrument where interest is paid. The interest payment is not part of the principal.
qualifying ratio	A borrower's total regular monthly debt as a percentage of gross monthly income.
Regulation Q	Federal Reserve Board regulation imposing caps on the rates that banks may pay on savings and time deposits. Currently time deposits with a denomination of $100,000 or more are exempt from Reg Q.
renegotiable rate	A type of variable loan rate involving a renewable short-term 'balloon' note. The interest rate on the loan is generally fixed during the term of the note, but when the balloon comes due, the lender may refinance it at a higher rate. In order for the loan to be fully amortized, periodic refinancing may be necessary.
security interest	The property or a portion of property offered as security.
seller's points	In reference to a loan, seller's points consist of a lump sum paid by the seller to the buyer's creditor to reduce the cost of the loan to the buyer. This payment is either required by the creditor or volunteered by the seller, usually in a loan to buy real estate. Generally, one point equals one percent of the loan amount.
surcharge	An extra charge imposed on those who purchase with a credit card instead of cash.
transaction account	A checking or similar account from which transfers can be made to third parties. Demand deposit accounts, negotiable order of withdrawal (NOW) accounts, automatic transfer service (ATS) accounts, and credit union share draft accounts are examples of transaction accounts at banks and other depository institutions
uncollected funds	The amount of bank deposits in the form of checks that have not yet been paid by the banks on which the checks are drawn.
variable rate	A variable rate agreement, as distinguished from a fixed rate agreement, calls for an interest rate that may fluctuate over the life of the loan. The rate is often tied to an index that reflects changes in market rates of interest. A fluctuation in the rate causes changes in either the payments or the length of the loan term. Limits are often placed on the degree to which the interest rate or the payments can vary.
wire transfer	Electronic transfer of funds; usually involves large dollar payments.
wraparound	A financing device that permits an existing loan to be refinanced and new money to be advanced at an interest rate between the rate charged on the old loan and the current market interest rate. The creditor combines or 'wraps' the remainder of the old loan with the new loan at the intermediate rate.
yield	The return on a loan or investment, stated as a percentage of price.

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