Finance Terms and Its Explanation

...

FOUR MONEY MANAGEMENT RATIOS:1. Solvency Ratio

- percentage of degree of exposure to insolvency2. Liquidity Ratio

- ability pay current debts with existing liquid assets in the event of income loss3. Savings Ratio

- indicates relative amount of cash surplus achieved during a given period4. Debt Service Ratio - measure of ability to pay debts promptly

Cash Budget - budget that takes into account estimated monthly cash receipts and expenses for incoming year- prepared on a cash basis- process: Estimate income, estimate expenses, finalize cash budget

Balanced Budget

- total income for the year equals or exceeds total expenses

Budget Control Schedule

- summary that shows how actual income and expenses compare with various budget categories and show variances

Time Value Of Money

- idea a dollar today is worth more in the future

Present Value

- value today of amount to be received in the future

Future Value

- value an amount today will grow if it earns an interest rate over a period

Compounding

- interest earned each year is left in account and become part of the balance

Annuity - fixed sum of money that occurs annually

Discounting

- process of finding present value. Inverse of compounding

--- CHAPTER 3 ---

See ppt

--- CHAPTER 4 ---

Cash Management - day-to-day routine administration of cash resources aka Liquid Assets

TYPES OF FINANCIAL INSTITUTION:1. Depository2. Nondepository

Deposit Insurance

- protects funds at banks against institutional failure

Demand Deposit

- account held at financial institutions from which funds can be withdrawn on demand by account holder. Aka checking account

Time Deposit

- savings deposit at a financial institution, expected to remain on deposit for longer periods of time than demand deposits.

? Negotiable Order of Withdrawal Account (NOW)

- checking account which the financial institution pays interest- no minimum balance

? Money Market Deposit Account (MMDA)

- federally insured savings account. Competes with money market mutual funds

? Money Market Mutual Fund (MMMF)

- pools funds of many investors and purchase high-return, short-term marketable securities

? Asset Management Account (AMA)

- comprehensive deposit account. Offered primarily by brokerage houses and mutual funds

? Electronic Funds Transfer Systems (EFTSs)

- use latest telecommunications to electronically transfer funds in and out

Safety Deposit Box - rented drawer in a bank's vault

Over-Draft

- when check is written greater than the account's balance

Account Reconciliation

- can uncover errors in recording checks or deposits

!!! Keep debt service ratio somewhere under 35%!!! Take-home pay represents amount of disposable income you receive from employer

--- CHAPTER 5 ---

Sales Contract - specifies the offering price and all conditions of offer

AUTOMOBILE LEASEClosed-End Lease

- aka walk-away lease- at end of term the lessee returns item

Open-End Lease

- the estimated residual value of the car is used to determine lease payments.- if car is worth less than estimated residual value, borrower must pay the remaining value at the end of lease term.

--- CHAPTER 6 ---

Cash Advance - loans on which interest accrue immediately

Base Rate

- rate a bank uses as a base for loans to individuals and small or midsize businesses