Money, Banking & Finance

An interest rate is the cost of borrowing money or the reward for saving it, expressed as a percentage of the principal per year.

A bond is a debt security in which an investor lends money to a government or company in exchange for periodic interest and repayment at maturity.

A stock is a share of ownership in a company, giving the holder a claim on part of its assets and profits.

A central bank is a national institution that manages a country's money supply, interest rates, and banking system.

The Federal Reserve is the central bank of the United States, responsible for monetary policy, bank supervision, and financial stability.

Quantitative easing is a central bank policy of buying large amounts of long-term assets to inject money and lower interest rates when short-term rates are near zero.

A liquidity trap occurs when interest rates are so low that monetary policy can't stimulate the economy because people hoard cash instead of spending or investing.

Compound interest is interest earned on both the original principal and on previously accumulated interest.

Present value is what a future sum of money is worth today, after discounting for the interest that could be earned in the meantime.

Diversification is spreading investments across different assets to reduce risk without necessarily lowering expected return.

Fiat money is currency that has value because a government declares it legal tender, not because it's backed by a commodity like gold.

Commodity money is money that has intrinsic value as a good, such as gold, silver, or salt, in addition to its use as money.

Barter is the direct exchange of goods and services for other goods and services without using money.

Maturity transformation is banks borrowing short-term (deposits) and lending long-term (loans), profiting from the rate spread while taking on liquidity and interest-rate risk.

The prime rate is the benchmark interest rate banks charge their most creditworthy customers; it tracks the federal funds rate, usually running about 3 percentage points above it.

Credit risk is the risk that a borrower fails to repay a loan or bond, causing the lender to lose principal or interest.

Liquidity risk is the risk of being unable to meet cash obligations on time, either because assets can't be sold quickly or funding dries up.

Interest rate risk is the risk that rising market interest rates reduce the value of a bond or fixed-rate asset, since bond prices move inversely to rates.

The term structure of interest rates is the relationship between bond yields and their time to maturity, visualized as the yield curve.

The default risk premium is the extra yield a risky bond pays over a risk-free bond to compensate investors for the chance the issuer defaults.

A bank run is a sudden mass withdrawal of deposits by customers who fear a bank will fail, which can push a solvent bank into failure.

Deposit insurance is a government guarantee that pays depositors up to a set limit if their bank fails, removing most of the incentive to join a run.

Forward guidance is a central bank's public signal about the likely future path of its policy rate, used to move longer-term interest rates immediately.

The zero lower bound is the floor on how far a central bank can cut its policy rate, set by the fact that holding physical cash always pays zero.

The discount window is the facility through which a central bank lends directly to banks against collateral, at a rate it sets itself.

Shadow banking is credit intermediation outside regulated banks, by firms that borrow short and lend long without deposit insurance or a central bank backstop.

Inflation targeting is a framework in which a central bank publicly commits to a numerical inflation goal and sets policy to reach it over the medium term.

Seigniorage is the revenue a government earns from issuing money, the gap between what the money is worth and what it costs to create.

A cryptocurrency is a digital asset recorded on a shared ledger and issued according to a network's rules rather than by a central bank or government.

A stablecoin is a cryptocurrency designed to hold a fixed value against a reference asset, usually a national currency, through backing or an algorithmic rule.

A central bank digital currency is digital money issued by the central bank itself, giving holders a direct claim on it rather than a deposit at a bank.

Gresham's law says that when law fixes the rate between two moneys, the one overvalued at that rate stays in circulation and the undervalued one is hoarded.

Systemic risk is the danger that one institution's or market's failure spreads through the financial system and disrupts credit for the whole economy.

Capital adequacy is the rule that a bank must fund itself with enough loss-absorbing capital, mostly equity, in proportion to the riskiness of its assets.