Confused about some of the terms you've read? Don't worry, this glossary should clear things up.
  • amortization

    The process of fully paying off debt 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.

  • balloon payment

    A large extra payment that may be charged at the end of a loan or lease.

  • Bureau of Labor Statistics (BLS)

    A research agency of the U.S. Department of Labor; it compiles statistics on work hours, average hourly earnings, employment and unemployment, consumer prices and many other variables.

  • capital

    In banking, the funds invested in a bank that are available to absorb loan losses or other problems and therefore protect depositors. Capital includes all equity and some types of debt.

  • capital market

    The market in which corporate equity and longer-term debt securities (those maturing in more than one year) are issued and traded.

  • central bank

    The principal monetary authority of a nation, which performs several key functions, including conducting monetary policy to stabilize the economy and level of prices. The Federal Reserve is the central bank of the United States. See U.S. Central Bank history.


  • collateral

    Property that is offered to secure a loan or other credit and that becomes subject to seizure on default. (Also called security interest.)

  • comparative advantage

    A situation in which a country, individual, company or region can produce a good at a lower opportunity cost than that of a competitor.

  • consumer price index (CPI)

    A measurement of the cost of living determined by the Bureau of Labor Statistics.

  • cost-benefit analysis

    Cost-benefit analysis is the examination of a public project and the evaluation of its total costs and benefits to all concerned.

  • credit default swap (CDS)

    A type of insurance that protects the lender if the borrower defaults. If the loan defaults, its liability becomes a credit for payment from the CDS issuer.

  • credit history

    A record of how a person has borrowed and repaid debt.

  • creditworthiness

    A creditor’s measure of a consumer’s past and future ability and willingness to repay debts.

  • current account balance

    The difference between the nation’s total exports of goods, services and transfers and its total imports of them. Current account balance does not include transactions in financial assets and liabilities.

  • cyclical unemployment

    Unemployment caused by a low level of aggregate demand associated with recession in the business cycle.

  • default

    Failure to meet the terms of a credit agreement.

  • deficit

    The amount each year by which government spending is greater than government income.

  • discount rate

    Officially the primary credit rate, it is the 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 14 days, subject to review and determination by the Board of Governors.

  • economic growth

    An increase in the nation’s capacity to produce goods and services.

  • 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 the currency of one nation in terms of the currency of another nation.

  • expansionary fiscal policy

    A policy to increase governmental expenditures and/or to decrease taxes.

  • externality

    An activity that causes incidental benefits or costs to others, but no corresponding compensation is provided to or paid by those who generate the externality.

  • Fannie Mae

    Fannie Mae (the Federal National Mortgage Association) is one of the three federally sponsored enterprises charged with providing funding and expanding access to the housing-finance market. In addition to purchasing loans directly from mortgage banks and other lenders, Fannie Mae also guarantees pools of mortgages against default, thereby making the secondary mortgage market more liquid.

  • 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.

  • federal funds rate

    Rate charged by a depository institution on an overnight loan of federal funds to another depository institution; rate may vary from day to day and from bank to bank.

  • Federal Reserve Bank (FRB)

    One of the 12 operating arms of the Federal Reserve System, located throughout the nation, that together with their branches carry out various System functions, including providing payment services to depository institutions, distributing the nation’s currency and coin, supervising and regulating member banks and bank holding companies, and serving as fiscal agent for the U.S. government.

  • finance charge

    The total dollar amount paid to obtain credit.

  • fiscal policy

    Federal government policy regarding taxation and spending, set by Congress and the President.

  • 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.

  • Freddie Mac

    Freddie Mac (the Federal National Home Loan Mortgage Corporation) is another federally -sponsored secondary-market agency. Like Fannie Mae, Freddie Mac both purchases loans directly from the primary mortgage market and guarantees loans that are sold on the secondary market.

  • Futures

    Contracts that require delivery of a commodity of specified quality and quantity, at a specified price, on a specified future date. Commodity futures are traded on a commodity exchange and are used for both speculation and hedging.

  • globalization

    Globalization is the increasing worldwide integration of markets for goods, services, labor and capital. International trade is expanding, foreign investment is exploding, international migration is flowing more and more, and products are being made in multiple countries

  • gold standard

    A monetary system in which currencies are defined in terms of a given weight of gold.

  • government securities

    Securities issued by the U.S. Treasury or federal agencies.

  • gross domestic product (GDP)

    Total value of goods and services produced by labor and property located in the United States during a specific period. (Go to Bureau of Economic Analysis for current data.)

  • gross national product (GNP)

    A country’s total output of goods and services from all forms of economic activity measured at market prices for a calendar year.

  • inflation

    A rate of increase in the general price level of all goods and services.

  • 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.

  • interest rate

    Percent paid on deposits and other investments determined by the interaction of the supply and demand for funds in the money market.

  • International Monetary Fund (IMF)

    International organization established for lending funds to member nations to promote international monetary cooperation among nations, assisting trade and specialized balance-of-payment deficit finance.

  • Keynesian economics

    British economist Keynes John Maynard Keynes maintained a theory that governments should use the power of the budget to maintain economic growth and stability and overcome the recessionary cycles common in most western economies.

  • liquidity

    Quality that makes an asset easily convertible into cash with relatively little loss of value in the conversion process. Sometimes used more broadly to encompass cash and credit in hand and promises of credit to meet needs for cash.

  • long-term interest rates

  • macroeconomics

    The study of economics in terms of whole systems with reference to general levels of output and income and to the interrelations among sectors of the economy.

  • market failure

    The failure of a market to allocate resources in the way that most efficiently satisfies the needs and wants of society.

  • market interest rates

    Rates of interest determined by the interaction of the supply of and demand for funds in freely functioning markets.

  • market prices

    Prices set by the market and by the law of supply and demand.

  • microeconomics

    The study of economics in terms of individual areas of activity (as a firm, household or prices).

  • monetary policy

    Federal Reserve actions to influence the availability and cost of money and credit, as a means of helping to promote high employment, economic growth, price stability and a sustainable pattern of international transactions. Tools of monetary policy include open market operations, the discount rate and reserve requirements.

  • money

    Anything that serves as a generally accepted medium of exchange, a standard of value and a means of saving or storing purchasing power. In the United States, currency and coins as well as funds in bank deposit accounts are examples of money. See more at U.S. Money.

  • money supply

    The amount of money (coins, paper currency, and checking accounts) that is in circulation in the economy.

  • national rate of unemployment

    The rate of unemployment attainable without stimulating an increase in the inflation rate.

  • New York Stock Exchange (NYSE)

    Located on Wall Street in New York City, the NYSE is the largest stock exchange in the world.

  • 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.

  • potential output

    The level of real GDP (gross domestic product) that can be sustained in the long run and that is consistent with constant inflation.

  • premium

    The amount by which the auction price of a bill, note or bond is higher than its face value.

  • price mechanism

    The price mechanism is the method through which the market organizes and adjusts itself. Prices determine what is produced, how it’s produced and who receives the product. If the market is working correctly, the workings of the price mechanism should result in the most efficient allocation of resources.

  • price stability

    An economy with relatively consistent values of goods and services from year to year, all things being equal, has price stability. When price levels are rapidly fluctuating, businesses and consumers don’t spend as much and the economy suffers.

  • productivity

    The amount of physical output for each unit of productive input.

  • public good

    A good that generates a social benefit that everyone can enjoy and that no one can be deprived of. Examples include national defense and clean air.

  • real GDP

    GDP (gross domestic product) adjusted for inflation. Real GDP provides the value of GDP in constant dollars, which is used as an indicator of the volume of the nation’s output.

  • real interest rates

    Interest rates adjusted for the expected erosion of purchasing power resulting from inflation. Technically defined as nominal interest rates minus the expected rate of inflation.

  • recession

    A significant decline in general economic activity extending over a period of time.

  • securities

    Paper certificates (definitive securities) or electronic records (book-entry securities) evidencing ownership of equity (stocks) or debt obligations (bonds).

  • short-term interest rates

    Interest rates on loan contracts – or debt instruments such as Treasury bills, bank certificates of deposit or commercial paper – having maturities of less than one year. Often called money market rates.

  • structural unemployment

    Long-term joblessness caused by shifts in the economy. Often structural unemployment occurs because of changes in technology.

  • systemic risk

    Risk that a disruption at a firm, in a market segment, to a settlement system or in a similar setting will cause widespread difficulties at other firms, in other market segments or in the financial system as a whole.

  • targeted incentives

    Incentives that benefit a specific company (e.g., loans at below-market interest rates or tax breaks) not general economic policies of the government that improve the business climate (e.g., corporate tax reductions).

  • trade deficit

    The amount by which merchandise imports exceed merchandise exports.

  • trade policy

    Indicates a country’s level of freedom in trading with other countries. Tariffs may be added to goods and services to collect government revenue or to encourage purchases of one product over another (typically a domestically produced one over an imported one).

  • Troubled Asset Relief Program (TARP)

    The Emergency Economic Stabilization Act of 2008 authorized by the Secretary of the Treasury to establish TARP to purchase, and to make and fund commitments to purchase, troubled assets from financial institutions.

  • U.S. Treasury securities

    Obligations of the U.S. government issued by the U.S. Department of the Treasury as a means of borrowing money to meet government expenditures not covered by tax revenues. All marketable Treasury securities have a minimum purchase amount of $1,000 and are issued in $1,000 increments. There are three types of marketable Treasury securities: bills, notes and bonds. The department also issues several types of nonmarketable securities, including savings bonds.

  • unemployment rate

    Percentage of the labor force that is unemployed and actively seeking a job. For more information, see Bureau of Labor and Statistics.

  • 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.

  • yield

    The return on a loan or investment, stated as a percentage of price.