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.