Glossary of Financial Terms

Amortization - The repayment of a loan by installments.

Periodic Rate - The monthly effective interest rate. For example, the periodic rate on a credit card with an 18% annual percentage rate is 1.5% per month.

Annual percentage rate (APR) - The periodic rate times the number of periods in a year. For example, a 5% quarterly return has an A.P.R. of 20%.

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. For example, a 1% per month rate has an APY of 12.68% (1.01^12 -1).

Annual rate of return - There are many ways of calculating the annual rate of return. If the rate of return is calculated on a monthly basis, we sometimes multiply this by 12 to express an annual rate of return. This is often called the annual percentage rate (APR). The annual percentage yield (APY), includes the effect of compounding interest.

Automated Clearing House (ACH) - A collection of 32 regional electronic interbank networks used to process transactions electronically with a guaranteed one-day bank.

Balloon - A long-term loan, often a mortgage, that has one large payment (the balloon payment) due upon maturity. Often done when refinancing or when a major cash flow event is anticipated. Therefore, a 5-year balloon on a 30-year payment schedule means that after 5 years, the principle is due to the financial institution holding the mortgage. At this time the collateral may be refinanced at the current interest rate.

Certificates of Deposit (CD) -An instrument that is issued by the credit union in the name of the member stating that a certain sum of money is on deposit and that the member agrees to keep this money at the credit union for a certain period of time. CDs vary widely in amount and term, and the rate of interest depends on both of these factors.

Credit Union - A not-for-profit institution that is operated as a cooperative and offers financial services such as better interest rates on accounts and loans, to its members.

Equity - In real estate, dollar difference between what a property could be sold for and debts claimed against it.

Escrow - Property or money held by a third party until the agreed upon obligations of a contract are met.

Individual Retirement Account (IRA) - A retirement account that may be established by any employed person. IRA contributions are tax deductible according to certain guidelines, and the gains in the account are tax-deferred.

Traditional IRA - This is the IRA that allows you to contribute pre-tax dollars if your income limits qualify. Both you and your spouse, whether the spouse is earning a paycheck or not, may contribute up to $2,000 per year for a total of $4,000. Earnings accumulate tax-free until you begin withdrawing the funds. There are limits to your contributions based upon your income and whether you are already covered by a pension plan. The penalties for early withdrawals from this account are waived if the money is used to pay for higher education expenses or for a first-time home purchase. In 2002, IRA contribution levels were expanded to allow $3000 contributions per year. Persons 50 years or over can also make a "Catch-up" contribution of $500 to bring their 2002 total to $3,500.00.

Education IRA - This account lets you set aside up to $2000 per year, per child (only $500 per year prior to 2002) to be used for post-secondary education. Although the contribution is not tax deductible, your earnings grow tax-free and you pay no taxes or penalties on money withdrawn to pay for qualified higher-education expenses, like tuition and fees, before the beneficiary reaches age 30.

Roth IRA - This account allows for contributions of $2,000 a year. And although contributions are not tax-deductible, there are no taxes when you withdraw the money provided it's been in the account at least five years and: you are older than 59.5 years, or you become disabled, or you die and it's paid to your beneficiary; or you use the money for a first-time house pur-chase ($10,000 lifetime withdrawal limit). In 2002, IRA contribution levels were expanded to allow $3000 contributions per year. Persons 50 years or over can also make a "Catch-up" contribution of $500 to bring their 2002 total to $3,500.00.