Vocabulary

annual percentage rate (APR)

measure that reflects the cost of borrowing money; determined as the interest rate charged each period multiplied by the number of periods in the year

annuity

fixed, regular payment stream paid in the same amount over a period of time

certificate of deposit (CD)

type of negotiable instrument usually issued by a bank or other financial institution that promises to pay a sum at a future date based on a given interest rate

compound interest

interest rate multiplied by the sum of any remaining unpaid principal and unpaid cumulative interest, as of the previous period

compounding

process of reinvesting an asset's earnings over an investment period to generate additional earnings above those generated by noncompounding earnings

consumer price index (CPI)

monthly measure that reflects the price increase or decrease of a core number of consumer goods and provides an indication of inflation or disinflation over time

cost-push inflation

situation that occurs when increased production costs, such as for raw materials and labor, cause elevated price levels

demand-pull inflation

increase in consumer demand for a product or service, causing an increase in price levels

effective annual rate (EAR)

measurement of the annual compound interest rate when compounding occurs more than once a year

Federal Reserve

central bank of the United States in charge of setting monetary policy for the nation

future value

measure of what an investment made today will be worth in the future, given number of periods, interest rate, and amount invested

inflation

continual increase in the average price levels of goods and services

interest rate

amount due per period, as a percentage of the amount owed at the end of the previous period

investment

asset purchased with the goal of achieving financial gain

monetary policy

actions of the central bank, current board, or other regulatory committee that determine the size and rate of growth of the supply of money, which in turn affects interest rates and inflation

present value

value in current dollars of a future payment discounted to the present

purchasing power

measure of how much of a good or service can be bought with a certain amount of money

rule of 72

mathematical shortcut that investors can use when calculating the potential return on an investment; simple formula in which 72 is divided by the compound annual interest rate

time value of money

concept that the value of money is sensitive to the passage of time, whereby the purchasing power of money can increase or decrease by the mere passage of time

usury

act of lending money to a borrower at an illegal and excessively high rate of interest