Glossary of Financial Terms
| amortization period | The actual number of years it will take to repay a mortgage loan in full. This period is usually longer than the loan's term. For example, a mortgage may have a 5-year term and a 25-year amortization period. |
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| annual percentage rate (APR) | The total cost of credit expressed as a yearly rate; includes the annual interest rate and any additional costs, such as annual fees. |
| annual return | The fund return for any 12-month period, including changes in unit value and the reinvestment of distributions, but not taking into account sales, redemption, distribution or other optional charges or income taxes payable by any unit holder that would reduce returns. |
| appraised value | An estimate of the market value of a property that is pledged as security for a mortgage. This value may be more or less than the purchase price of the property. |
| appreciation | The increase in a property's value over time. |
| asset | Anything owned by, or owed to, an individual or business which has commercial or exchange value. For example, cash or property. |
| asset mix | The weighting of assets in an investment portfolio among different asset classes, such as shares, bonds, property, cash, and overseas investments. |
| bank draft | A guaranteed form of payment which is issued in amounts over $5,000. |
| blended-rate mortgage | A mortgage that combines the amount you owe under an existing mortgage with additional money that you borrow. The interest rate for the new amount is a blend of the interest rate of the old mortgage and the interest rate for the additional amount to be borrowed. |
| bond | A debt security issued by a government or company that provides regular interest payments at specified rates while the bond is held. The face value is paid when it matures. Short-term bonds mature in less than five years; medium-term bonds mature in six to ten years; and long-term bonds mature in eleven years or more. |
| Canada Savings Bond (CSB) | A bond issued each year by the federal government. These bonds can be cashed at any time for their full face value. |
| Central 1 | Central 1 Credit Union is the central financial facility, payments settlement centre and trade association for Credit Unions in British Columbia and Ontario. Owned by member Credit Unions, it exists to serve their needs through provision of essential and discretionary services. |
| certified cheque | A certified cheque is a form of cheque for which the issuing financial institution verifies that sufficient funds exist in the account to cover the amount of the cheque. Those funds are then set aside in the financial institution's internal account until the cheque is cashed or returned by the payee. Thus, a certified cheque cannot 'bounce', and, in this manner, its liquidity is similar to cash. |
| Canada Mortgage and Housing Corporation (CMHC) | A federal Crown corporation that administers the National Housing Act. It provides mortgage default insurance for high-ratio mortgages. It allows people to qualify for mortgages with less than 20% down payment or equity. |
| closed mortgage | A mortgage that usually may not be prepaid or renewed early without an interest penalty, which could be the greater of three months interest or the interest rate differential. |
| closing date | The date that the purchase of a property becomes final and the new owner takes possession. |
| closing costs | Expenses in addition to the price of buying a home. |
| conventional mortgage | A first mortgage up to 80% of the property's appraised value or purchase price, whichever is lower. |
| co-borrower | The secondary borrower on a loan. |
| compound interest | Interest payment calculated on the accumulated unpaid interest as well as on the original principal. |
| consumer finance company | A company providing financial services such as instalment and home equity loans that are regulated under provincial laws. |
| collateral | A pledge of property or other assets against a loan, which is liquidated in the event that payments are not made as required. |
| compounding | When an asset generates earnings that are then reinvested and generate their own earnings. |
| counter-offer | One party's written response to the other party's offer during negotiations between the buyer and the seller. |
| credit | 1.) The funds on deposit in a bank account. The opposite of a credit is a debit. 2.) Money that is borrowed from a financial lender, such as the Credit Union. A credit card, for example, is a card that allows access to funds which then have to be repaid. |
| credit bureau | An organization that provides financial institutions with credit information concerning existing or potential customers who are looking to obtain credit services. |
| credit card | A revolving source of credit with a pre-established limit. Interest is charged on a credit card whenever there is an outstanding balance. |
| credit limit | The maximum balance that can be charged on a credit card or borrowed from a line of credit. |
| credit report | A report of any card or loan that is currently held, was held in the past, or for which application has been made. It includes the credit limits of those cards or loans and the payment history. It is used by lenders as part of the decision-making process when evaluating whether to extend new or additional credit to a borrower. |
| credit union | A financial co-operative comprised of people who share a common bond, such as employees of a company or a specific ethnic origin. Credit Unions offer their members specific benefits, such as community sponsorships. |
| debit | Funds which have been deducted from an account. The opposite of a debit is a credit. |
| debt consolidation | A method available to consumers to better manage the amount of debt they carry. The consumer borrows from one lender an amount equal to the debts he/she owes to several lenders, and uses that money to pay off those debts. Benefits of such a loan include combining monthly payments into a single payment and possibly lowering the amount of the overall monthly payments. |
| deed | A legal document that transfers ownership of a property to the buyer. |
| Deposit Insurance Corporation of Ontario (DICO) | An Ontario Provincial Agency established under the Credit Unions and Caisses Populaires Act, 1994. DICO's role is to protect depositors of Ontario Credit Unions and Caisses Populaires from loss of their deposits. Deposit insurance is part of a comprehensive depositor protection program for all Ontario Credit Unions which is backed by provincial legislation. |
| direct deposit | Funds are electronically transferred to an account by a financial institution or payroll service, generally by an employer or government department. |
| diversification | An investment technique intended to minimize risk by utilizing a wide variety of investments within a portfolio. In a diversified portfolio, a decline in the value of one investment, for example, should be offset by the strength of other investments. |
| down payment | The initial payment on a credit purchase made which is deducted from the principal balance that is owed. |
| earned income | Earned income is generally an individual's salary or wages from employment. It also includes some taxable benefits. Earned income also includes business income if the individual is self-employed. Earned income is used as the basis for calculating RRSP maximum contribution limits. |
| electronic funds transfer (EFT) | Funds which are electronically credited to an account or electronically debited from an account on an ongoing basis. For example, a pre-authorized monthly bill payment, or a monthly loan or mortgage payment. A wire transfer is also a form of EFT. |
| easement | A legal right to use or cross another person's land for limited purposes. For example, a utility company's right to run wires or lay pipes across a property. |
| equity | The net worth of a company. This represents the ownership interest of the shareholders (common and preferred) of a company. For this reason, shares or stocks are often known as equities. |
| Exchange Network | The only inter-institutional, full-function ATM network in Canada. There are no service charges when withdrawing or depositing funds through The Exchange Network of ATMs. |
| first mortgage | A debt registered against a property that has first call on that property. |
| growth fund | A mutual fund that seeks long-term capital growth. This type of fund invests primarily in equity securities. |
| gross debt service ratio (GDS) | It is one of the mathematical calculations used by lenders to determine a borrower's capacity to repay a mortgage. It takes into account the mortgage payments, property taxes, approximate heating costs, and 50% of any maintenance fees, and this sum is then divided by the gross income of the applicants. Ratios up to 32% are acceptable. |
| guarantor | A person with an established credit rating and sufficient earnings who guarantees to repay the loan for the borrower if the original borrower defaults on payment. |
| guaranteed investment certificate (GIC) | An investment that gives you a guaranteed rate of return over a fixed period of time, usually between 30 days and 5 years. GICs are available from Credit Unions, banks, trust companies, and other financial institutions. |
| home equity line of credit | A revolving loan that allows you to borrow amounts up to your credit limit as you need them. As you pay back the money you've borrowed, your available credit is restored and you can borrow from the line of credit again. You pay interest on the amount outstanding. |
| income fund | A mutual fund that seeks regular income. This type of fund invests primarily in government, corporate and other types of bonds, debt securities, and other income producing securities and in certain circumstances can also hold common and preferred shares. |
| index | A statistical measure of a stock market based on the performance of a sample of securities in that market. For example, the S&P/TSX Composite Index reflects the performance of the most actively traded stocks on the Toronto Stock Exchange. |
| index fund | A mutual fund that aims to track the performance of a specific stock or bond index. This process is also referred to as indexing and passive management. |
| installment loan | A type of a consumer loan repaid in regular installments over a specified period. It is often secured for the purpose of consolidating debts, paying taxes or managing a single large expense. |
| installment purchase | A loan specifically to purchase 'big-ticket' items, such as car or major appliances. A down payment is usually required and a contract is signed for a balance due, plus interest and service charges. The debt is repaid in equal instalments over a specified period of time. |
| Interac Direct Payment | Instead of paying with cash or a credit card, Interac Direct Payment allows you to pay for your purchase with a debit card, such as your Member Card. The amount of the purchase is electronically debited, or withdrawn, from your bank account. |
| Interac system | Canada's ATM and electronic debit system. |
| interest | The cost of a loan or the compensation paid for the use of money. For example, interest is paid for deposits in savings accounts, and interest is charged for money borrowed as a loan. |
| late fee | A fee usually charged for a late payment (an account is considered late if a payment has not been paid by the due date) in provinces where allowed by law. |
| lien | Any legal claim against a property or item, that is filed to ensure the repayment of a debt. |
| line of credit | A revolving source of credit with a pre-established limit. You access the funds only as you need them, and any amount that you pay back becomes accessible to you again. Unlike a personal loan, a line of credit permits you to write cheques and make ATM withdrawals, and requires you to pay interest only on the funds that you actually use. |
| load | A sales fee (or commissions) that is charged when you buy a mutual fund. |
| maturity date | The date on which final payment is due. |
| Member Card | Enables you to directly access your account when paying for purchases. Instead of paying in cash or with a credit card, a debit card allows the specified amount of the purchase to be electronically debited, or withdrawn, from an account. It also allows access to your account through an ATM. |
| mutual fund | Pooling your money with that of other investors. An investment professional called a portfolio advisor takes that money and invests it for all the investors in a variety of different securities as determined by the investment objectives of the mutual fund. This gives you the benefit of diversification. |
| net asset value | The value of all the holdings of a mutual fund, less the fund's liabilities. |
| non-sufficient funds (NSF) | If there are insufficient funds in your account to cover a cheque that you have written or a pre-authorized payment that you have already arranged, a service fee for non-sufficient funds is charged. |
| online bill payment | The electronic payment of a bill via the Internet. The specified amount of the bill is electronically debited from your account. Once the bill has been paid online it may take up to three business days to register with the company that is receiving the payment. |
| overdraft protection | A short-term source of credit which allows you to overdraw on your account up to a pre-established limit. Overdraft protection is attached to your Credit Union Chequing Account. Members with payroll direct deposit are automatically approved for overdraft protection. |
| payroll deduction | A fixed amount is deducted per pay period and credited to the account of choice. For example, a payroll deduction could be directed toward a loan payment, RRSP contribution, mutual fund or regular savings. |
| personal loan | A lump sum that you borrow from a financial institution for a specified period of time. To repay the loan, you pay interest on the entire lump sum, and make payments on a scheduled basis. |
| personal identification number (PIN) | A secret code that you use to access your account at an ATM, point-of-sale terminal, and when banking by telephone. |
| prepayment privilege | An agreement allowing you to pay part or all of a loan in advance of a contracted due date. |
| principal | The amount of a loan or the unpaid amount of a purchase before finance charges or other borrowing costs associated with the loan are either added or deducted; also known as amount financed. |
| point-of-sale (POS) | The terminal at which a debit card is used to make a direct payment transaction. |
| pre-authorized payment | A system where funds are electronically debited from your account on a specified date by a financial institution or by an insurance or utility company. |
| prospectus | A legal document that must be filed with securities regulators in order to distribute securities, including mutual funds. Mutual fund dealers are required by law to distribute this document to investors before the purchase of any units. It contains all key information, such as investment objectives and strategies, risk factors and financial highlights. |
| qualified investments | Investments that can be held in an RRSP. These generally include Canadian dollar savings accounts, GICs, and term deposits; shares of Canadian and foreign companies listed on a prescribed stock exchange; shares of some over-the-counter US and Canadian companies; shares of some small businesses; certain types of bonds and money-market investments; certain types of mortgages (including your own); certain covered call options, warrants and rights; and certain mutual funds. |
| redeemable | The option to redeem (cash-in) part or all of an investment before it matures. Depending on the investment, early redemption may entail an interest rate penalty. |
| refinance | The rescheduling of payments on an instalment loan, generally for smaller payments extending over a longer period of time. |
| registered retirement income fund (RRIF) | An account designed to provide retirees with a source of income after they have retired. Usually a RRIF is comprised of the funds that roll over from an RRSP, as an RRSP cannot be kept after the age of 71. The capital and interest in a RRIF accumulates tax-free, but is subject to tax upon withdrawal. Persons with a RRIF can withdraw any amount of money from the fund at any time, but any amount over the minimum will be subject to various degrees of withholding tax. The funds in a RRIF can only be sourced from another RRIF, an RRSP or another pension plan. |
| registered education savings plan (RESP) | A savings account designed to help parents save for their children's post-secondary education. It has the advantage of accumulating tax-free interest as well as allowing for parents to apply for the Canada Education Savings Grant. Contributors as well as beneficiaries must be Canadian citizens and have a SIN. Anyone can open an individual RESP for a child, but family RESPs are limited to relatives through blood or adoption only. Different funds may have other rules. |
| risk | Risk measures the possibility that your investment may lose or gain value as compared to the expected rate of return. Risk is different from uncertainty, which is not measurable. |
| registered retirement savings plan (RRSP) | A retirement savings plan registered with the federal government. Each year, a certain amount is contributed and deducted from gross annual income. As a result, less income tax is paid while setting money aside for retirement. |
| savings fund | A mutual fund that seeks to preserve capital. This type of fund invests primarily in short-term securities with an average term to maturity of one year or less, or in the case of money market funds, 90 days or less. |
| secured loan | A loan is granted against security (or collateral) owned by the borrower to decrease the risk assumed by the lender. Upon default (failure to repay the loan), the lender is entitled to take possession of the collateral as payment for the money owed. |
| simple interest | Interest calculated on the principal balance outstanding as long as any portion remains unpaid. |
| spousal RRSP | Contributions to an RRSP for a spouse that are claimed as an income tax deduction by the contributor. |
| stop payment | Payment of a cheque or other pre-authorized payment is not completed as long as the funds have not yet been disbursed. For example, stop payment on a post-dated cheque if the product or service for which that cheque was initially written is no longer required. |
| systematic withdrawal plan | Plans offered by mutual fund companies that allow unit holders to receive payment from their investment at regular intervals. |
| tax-free savings account (TFSA) | A federally registered government savings account that is available to Canadians aged 18 and older to save up to $5,000 a year in a tax-free plan. Interest earned on investments in a TFSA is not taxed, even when withdrawn. |
| term | The period of time during which a financial contract such as a GIC or loan is in force. |
| tiered interest rate | A pre-set scale of interest which is based on the premise that higher sums of money earn higher rates of interest. |
| title | Legal evidence of ownership of property. |
| total debt service ratio (TDS) | One of the other mathematical calculations used by lenders to determine a borrower's capacity to repay a mortgage. It takes into account the mortgage payments, property taxes, approximate heating costs, and 50% of any maintenance fees, and any other monthly obligations (i.e. personal loans, car payments, lines of credit, credit card debts, other mortgages, etc.), and this sum is then divided by the gross income of the applicants. Ratios up to 40 % are acceptable. |
| unsecured loan | A loan based on the borrower's past credit history and the lender's assessment of the borrower's intention and ability to repay the money borrowed. The lender has no security or collateral of the borrower's to fall back on should the loan not be repaid as promised. |
| variable interest rate | An interest rate that can increase or decrease over the life of the loan, based on fluctuating rates set by the financial institution, such as prime rate. |
| volatility | A measure of the amount of change in the daily price of a security over a specified period of time. It is usually given as the standard deviation of the daily price changes of that security on an annual basis. |
| wire transfer | An electronic transmission of money from one place to another. For example, you might request that your financial institution transfer money from your account in Vancouver to the account of a relative in Quebec City. To do this, you would provide the relative's name and account number, as well as the address of the financial institution in Quebec City. Your financial institution would then 'wire' the funds, which would usually arrive within a couple of days. |
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