Glossary of Financial Terms

12b-1 fees: fees paid by a mutual fund out of its assets to cover the costs of marketing and selling shares and sometimes to cover the costs of providing shareholder services. "Distribution fees" include fees to compensate brokers and others who sell fund shares and to pay for advertising, the printing and mailing of prospectuses to new investors, and the printing and mailing of sales literature. "Shareholder Service Fees" are fees paid to persons to respond to investor inquiries and provide investors with information about their investments.

401(k) plan: a tax-deferred investment and savings vehicle that serves as a personal retirement fund for employees.

Acceleration clause: a stipulation in a loan contract stating that the entire balance becomes due immediately if other contract conditions are not met.

Accrued interest: interest that has accumulated on any unpaid principal on a loan

Account fee: a fee that some mutual funds impose on investors for the maintenance of their accounts. For example, accounts below a specified dollar amount may have to pay an account fee.

Amortization: liquidation of a debt by making periodic payments over a set period, at the end of which the balance is zero.

Appreciation: an increase in value or price.

Back-end load: a sales charge (also known as a "deferred sales charge") investors pay when they redeem (or sell) mutual fund shares, generally used by the fund to compensate brokers.

Balance sheet: a financial statement showing a “snapshot” of the assets, liabilities and net worth.

Bankruptcy: a legal proceeding declaring that an individual is unable to pay debts.

Beneficiary: the person designated to receive the proceeds of an investment or insurance product in case of the owner's death

Blue chip stock: stock in a company with a national reputation for quality, reliability, and resilience

Capitalization of interest: Accrued interest added to the principal balance of a loan each period. Subsequent interest accrues on the sum of this new higher principal.

Certificates of deposit: a certificate issued by a bank to an individual depositing money in an account for a specified period of time.

Collateral: asset(s) pledged to secure a loan.

Closed-end fund: a type of investment company that does not continuously offer its shares for sale but instead sells a fixed number of shares at one time (in the initial public offering) which then typically trade on a secondary market, such as the New York Stock Exchange or the Nasdaq Stock Market. Legally known as a "closed-end company."

Compound interest: interest computed on the sum of the original principal and accrued interest.

Contingent Deferred Sales Load: a type of back-end load, the amount of which depends on the length of time the investor held his or her mutual fund shares. For example, a contingent deferred sales load might be (X)% if an investor holds his or her shares for one year, (X-1)% after two years, and so on until the load reaches zero and goes away completely.

Conversion: a feature some mutual funds offer that allows investors to automatically change from one class to another (typically with lower annual expenses) after a set period of time. The fund's prospectus or profile will state whether a class ever converts to another class.

Corporate bond: a certificate representing the purchaser’s agreement to lend money to a business on the promise that the debt will be paid, with interest, at a specific time.

Credit: the granting of money or something else of value in exchange for a promise of future repayment.

Credit union: a cooperative organization that provides financial services to its members.

Creditor: lender

Deductible: the amount of loss paid by an insurance policyholder. The deductible may be expressed as a specified dollar amount or a percent of the claim amount.

Default (on a loan): Failure to make payments on time or to meet other contract terms that persists for a consecutive 270-day period.

Default risk: the potential that a bond issuer will not pay the interest or return an investor's money when it matures.

Deferment: A period during the repayment phase of a loan when the borrower does not have to make principal payment and may or may not have to pay interest. Deferment may be granted when the borrower returns to school (for a school loan), is on active military duty, or is experiencing financial hardship.

Deferred Sales Charge: see "back-end load."

Delinquency: An account status that indicates that the borrower failed to make timely payments under a loan or other credit agreement.

Distribution Fees: see "12b-1 fees."

Dividend: a share of profits paid to a stockholder.

Equity: ownership interest in an asset after liabilities are deducted.

Exchange Fee: a fee that some mutual funds impose on shareholders if they exchange (transfer) to another fund within the same fund family.

Exchange-Traded Fund (ETF): a type of an investment company (either an open-end company or UIT) whose objective is to achieve the same return as a particular market index.

Expense Ratio: a fund's total annual operating expenses (including management fees, distribution (12b-1) fees, and other expenses) expressed as a percentage of average net assets.

Face value: the principal amount of a bond, which will be paid to the investor at maturity.

Financing fee: the fee a lender charges to originate a loan. The fee is based on a percentage of the loan amount, one point representing 1 percent.

Forbearance: A period of time during which a borrower is temporarily allowed to stop making payments on a loan or to pay a lower monthly amount. Forbearance is granted at the discretion of the lender, normally for reasons of financial hardship.

Foreclosure: the legal process used to force the payment of debt by selling the collateral

Front-end Load: an upfront sales charge investors pay when they purchase fund shares, generally used by the fund to compensate brokers. A front-end load reduces the amount available to purchase fund shares.

Government Savings bond: a document representing a loan of more than one year to the U.S. government, to be repaid, with interest on a specified date.

Grace period: For student loans, the period of time before the borrower must begin making payments on the loan. For Federal Stafford loans, the grace period lasts for six months after you leave school or become enrolled less than half-time.

Grant: a form of student financial aid or a monetary award that does not have to be repaid.

Hedge fund: a private, unregistered investment pool (not a mutual fund) traditionally limited to experienced, wealthy investors.

Illiquid security: according to the SEC, a security that cannot be sold within seven days at the approximate price used by the fund in determining NAV.

Index fund: a type of stock fund or Unit Investment Trust (UIT) whose investment objective typically is to achieve the same return as a particular market index, such as the S&P 500 Composite Stock Price Index, the Russell 2000 Index, or the Wilshire 5000 Total Market Index.

Individual retirement account (IRA): an investment account to which individuals can contribute each year on a tax-deferred basis.

Inflation: a sustained increase in the prices of goods and services.

Inflation risk: the risk that inflation will outpace and erode investment returns over time

Initial public offering (IPO): when a company first sells its shares to the public

Investment company: a company that issues and invests in securities. The three basic types of investment companies are mutual funds, closed-end funds, and unit investment trusts.

Leverage: the ability to use a small amount of money to attract more money, including loans, grants and
equity investments.

Liability: 1. debt 2. a kind of insurance for the policyholder’s legal obligation to pay for either bodily
injury or property damage caused to another party.

Lien: a creditor’s claim against a property, which may entitle the creditor to seize the property if a debt is not repaid.

Liquidity: the ease with which an investment can be converted into cash.

Load: see "Sales charge"

Loan servicer: The organization hired by the lender to administer the loan and collect payments from the borrower. Not all lenders use outside servicers.

Management fee: a fee paid out of fund assets to the fund's investment adviser or its affiliate for managing the fund's portfolio or any administrative fee payable to the investment adviser that is not included in the "other expenses" category. The management fee typically appears as a category under "Annual Fund Operating Expeneses" in the prospectus's fee table.

Market Index: a measurement of the performance of a specific group of stocks considered to represent a particular sector of the stock market. For example, the Dow Jones Industrial Average (DJIA) is an index of 30 "blue chip" U.S. stocks of industrial companies (excluding transportation and utility companies).

Master promissory note: The contract between a borrower and a lender that outlines the terms of the loan.

Maturity: the time when a note, bond or other investment option comes due for payment to investors.

Money Market Mutual Fund: a low-risk, low-return fund that is restricted to investing in the short-term money market.

Municipal bond: a bond issued by cities, counties, or states to finance public projects, such as the construction of bridges, schools or highways.

Mutual fund: an investment tool that pools the money of many shareholders and invests it in a diversified portfolio of securities, such as stocks, bonds, and money market assets.

NAV (Net Asset Value): the value of a fund's assets minus its liabilities. SEC rules require funds to calculate the NAV at least once daily. To calculate the NAV per share, simply subtract the fund's liabilities from its assets and then divide the result by the number of shares outstanding.

No-load Fund: a fund that does not charge any type of sales load. But not every type of shareholder fee is a "sales load," and a no-load fund may charge fees that are not sales loads. No-load funds also charge operating expenses.

Open-End Company: the legal name for a mutual fund. An open-end company is a type of investment company

Operating Expenses: the costs a fund incurs in connection with running the fund, including management fees, distribution (12b-1) fees, and other expenses.

Par value: the face value of a stock or bond

Portfolio: an individual's or entity's combined holdings of stocks, bonds, or other securities and assets.

Premium: the amount of money required for coverage under a specific insurance policy for a given period of time. Depending on the policy agreement, the premium may be paid monthly, quarterly, semiannually or annually.

Prepayment: Paying off a loan earlier than the due date so as to avoid high interest accumulation.

Principal: 1. the unpaid balance on a loan not including interest. 2. the amount of money invested, not including interest

Prime rate: the lowest interest rate on bank loans, offered to preferred borrowers.

Profile: a document that summarizes key information about a mutual fund's costs, investment objectives, risks, and performance. Although every mutual fund has a prospectus, not every mutual fund has a profile.

Prospectus: a document that every mutual fund must have to describe the fund to prospective investors. The prospectus contains information about the mutual fund's costs, investment objectives, risks, and performance.

Purchase Fee: a shareholder fee that some funds charge when investors purchase mutual fund shares. Not the same as (and may be in addition to) a front-end load.

Rate of return: how fast money in an investment grows.

Redemption Fee: a shareholder fee that some funds charge when investors redeem (or sell) mutual fund shares. Redemption fees (which must be paid to the fund) are not the same as (and may be in addition to) a back-end load (which is typically paid to a broker). The SEC generally limits redemption fees to 2%.

Return (on investment) or ROI: the profit made on an investment.

Risk: A measure of the likelihood of loss or profit; the uncertainty of an investment’s rate of return.

Sales Charge (or "Load"): the amount that investors pay when they purchase (front-end load) or redeem (back-end load) shares in a mutual fund, similar to a commission. The SEC's rules do not limit the size of sales load a fund may charge, but NASD rules state that mutual fund sales loads cannot exceed 8.5% and must be even lower depending on other fees and charges assessed.

Savings account: A deposit account at a bank or credit union that pays interest and allows withdrawals.

Share Classes: different types of shares issued by a single mutual fund, often referred to as Class A shares, Class B shares, and so on. Each class invests in the same "pool" (or investment portfolio) of securities and has the same investment objectives and policies. But each class has different shareholder services and/or distribution arrangements with different fees and expenses and therefore different performance results.

Statement of Additional Information (SAI): a document that conveys information about an open- or closed-end fund that is not necessarily needed by investors to make an informed investment decision, but that some investors find useful. Although funds are not required to provide investors with the SAI, they must give investors the SAI upon request and without charge. Also known as "Part B" of the fund's registration statement.

Stock: An investment that represents shares of ownership of the assets and earnings of a corporation.

Shareholder Service Fees: fees paid to investment advisers associated with a fund to provide information and assistance to shareholders of that fund. See also "12b-1 fees."

Subsidized student loan: a loan for which the federal government pays the interest that accrues during the student's in-school, grace, authorized deferment periods.

Tax-deferred: not subject to income tax until it is withdrawn from an account

Total Annual Fund Operating Expense: the total of a fund's annual fund operating expenses, expressed as a percentage of the fund's average net assets. You'll find the total in the fund's fee table in the prospectus.

Treasury bill: an investment issued by the U.S. government for a year or less.

Treasury bond: a government bond with a term of more than 10 years during which interest is paid semiannually.

Treasury Inflation-Protected Security (TIPS): a bond or note issued by the U.S. Treasury that is tied to inflation so that the principal amount of the investment increases or decreases according to the annual inflation rate, thereby protecting against inflation risk.

Treasury note: a government security with a maturity that can range from two to 10 years during which interest is paid semiannually.

Unit Investment Trust (UIT): a type of investment company that typically makes a one-time "public offering" of only a specific, fixed number of units. A UIT will terminate and dissolve on a date established when the UIT is created (although some may terminate more than fifty years after they are created). UITs do not actively trade their investment portfolios.

Unsubsidized student loan: A non-need-based loan for which the borrower is responsible for all accrued interest. Includes PLUS loans.

U.S. savings bond: a security issued and backed by the U.S. government in denominations of $50 to $10,000.