A Glossary of Commonly Used Financial Terms (#1 in an Occasional Series)

Education is one of the primary objectives of this blog. Occasionally we will explore and explain commonly used, and often misunderstood, banking terms. We recommend two resources that help define financial terms: Investor Words and Morgan Stanley.

Our goal is to clarify many of the financial decisions you make on a daily basis. Feel free to send us suggestions of terms you would like to see defined.

Certificate of Deposit (CD): Short- or medium-term, interest-bearing, FDIC-insured debt instrument offered by banks and savings and loans companies. CDs offer higher rates of return than most comparable investments, in exchange for tying up invested money for the duration of the certificate's maturity. Money removed before maturity is subject to a penalty. CDs are low risk, low return investments, and are also known as “time deposits,” because the account holder has agreed to keep the money in the account for a specified amount of time, anywhere from three months to six years. (http://www.investorwords.com/808/Certificate_of_Deposit.html)

Savings Account: A deposit account at a bank or savings and loan which pays interest, but cannot be withdrawn by check writing. (http://www.investorwords.com/4388/savings_account.html)

Checking Account: An account which allows the holder to write checks against deposited funds. Checking accounts which pay interest are sometimes referred to as negotiable order of withdrawal (NOW) accounts. The interest rate often depends on how large the balance in the account is and most charge a monthly service fee if the account balance falls below a preset level. (http://www.investorwords.com/846/checking_account.html)

Annual Percentage Yield (APY): Annual percentage yield is the amount you earn on an interest-bearing investment in a year, expressed as a percentage. For example, if you earn $60 on a $1,000 certificate of deposit (CD) between January 1 and December 31, your APY is 6%. When the APY is the same as the interest rate that is being paid on an investment, you are earning simple interest. But when the APY is higher than the interest rate, the interest is being compounded, which means you are earning interest on your accumulating interest. (http://www.morganstanleyindividual.com/customerservice/dictionary)