Category: Financial Terms

What is a creditor? A creditor is an individual or organization that extends credit—money, goods, or services—to another party with the expectation of future repayment. Credit is typically governed by a loan agreement or contract and may be secured (backed by collateral) or unsecured (no collateral). Key points Creditors include banks, finance companies, businesses, and…

Credit Unions: What They Are, How They Work, and Pros & Cons Key takeaways * A credit union is a member-owned, not-for-profit financial cooperative that provides banking services. * Because they operate for members rather than shareholders, credit unions often offer higher deposit rates, lower loan rates, and lower fees. * Drawbacks can include fewer…

Credit Spread: Meaning for Bonds and Options Key takeaways * A credit spread is the difference in yield between two debt securities of the same maturity but different credit quality, usually expressed in basis points (1 bp = 0.01%). * The aggregate spread between corporate bonds and 10‑year Treasurys is an important gauge of economic…

Credit Score A credit score is a three-digit number that summarizes an individual’s creditworthiness. Lenders use it to decide whether to extend credit and on what terms (interest rates, fees, required deposits). The most commonly used model is the FICO Score, which ranges from 300 to 850. Key takeaways Credit scores influence loan approvals, interest…

Understanding Credit Risk What is credit risk? Credit risk is the chance that a borrower (an individual, company, or government) will fail to meet contractual debt obligations—such as missed loan payments or bond coupon/principal payments—causing financial loss to the lender or investor. Lenders charge interest to compensate for taking on credit risk, and they evaluate…

Credit Report: Definition, Contents, and How to Get It A credit report is a detailed record of your credit history compiled by a credit bureau. Lenders, insurers, landlords, employers (with permission), and government agencies may use it to evaluate your creditworthiness. Regularly checking your credit reports helps you spot errors, detect identity theft, and understand…

Credit Rating Key takeaways A credit rating is an independent assessment of a corporation’s or government’s ability to repay debt. Ratings are letter grades (e.g., AAA to C/D) that signal relative default risk. The three largest rating agencies are S&P Global, Moody’s, and Fitch. Ratings influence borrowing costs: lower ratings generally mean higher interest rates….

Credit-Linked Note (CLN) A credit-linked note (CLN) is a structured debt instrument that combines a regular bond-like security with an embedded credit default swap (CDS). It lets an issuer transfer specific credit risk—typically the risk that a particular borrower or reference entity defaults—to investors in exchange for a higher yield. How a CLN is created…

Understanding Credit Limits: What They Are, How They Work, and Why They Matter Key takeaways * A credit limit is the maximum amount a lender allows you to borrow on a credit card or revolving line of credit. * Limits are set based on factors such as credit score, income, payment history and, for secured…

Understanding Credit Facilities: Types, How They Work, and Key Considerations Key takeaways A credit facility is a prearranged borrowing arrangement that lets a business access funds as needed instead of receiving a single lump-sum loan. Common forms include revolving facilities, committed facilities, term loans, and retail credit arrangements (e.g., credit-card-type financing). A facility is not…

Credit Default Swap (CDS) What is a Credit Default Swap? A credit default swap (CDS) is a financial derivative that transfers the credit exposure of a debt instrument (for example, bonds, mortgage‑backed securities, or loans) from one party to another. The buyer of protection makes regular premium payments to the seller of protection. If a…

Credit Card Dump: Definition, How It Works, Examples, and Protection What is a credit card dump? A credit card dump is the unauthorized copying, theft, or mass exposure of credit card data. Stolen card numbers, expiration dates, and sometimes CVV codes are collected and then sold or used for fraudulent transactions. Dumps can be the…

What Is a Credit Card Balance? A credit card balance is the total amount you currently owe to your card issuer. It rises when you make purchases, take cash advances, or incur fees, and falls when you make payments or receive refunds. Any amount not paid by the statement due date typically carries forward and…

Credit Card: What It Is, How It Works, and How to Get One Definition A credit card is a plastic or metal payment card issued by a bank or financial institution that lets you borrow funds to buy goods and services. Cardholders must repay borrowed amounts, plus any interest and fees, either in full by…

What Is a Credit Bureau? A credit bureau (credit reporting agency in the U.S.) collects, compiles, and sells information about individual credit histories to lenders and other authorized users. Bureaus do not decide whether you receive credit; they provide reports and scores that help creditors assess credit risk. Key takeaways * A credit bureau gathers…

Credit Analyst A credit analyst evaluates the creditworthiness of individuals, companies, and debt instruments to determine the likelihood of repayment and the level of credit risk. Their work helps lenders and investors decide whether to extend credit, set interest rates and limits, and manage overall portfolio risk. Key takeaways Credit analysts assess borrowers’ financial health…

Credit: What It Is and How It Works Credit is the arrangement that lets a borrower receive money, goods, or services now and repay the lender later—usually with interest. The term also describes an individual’s or company’s creditworthiness and has a specific meaning in accounting as a bookkeeping entry. Key takeaways Credit can mean a…

Creative Destruction Creative destruction describes the process by which innovation and technological change dismantle established products, firms, and industries to make way for new ones. Coined by economist Joseph Schumpeter, the concept explains how capitalism evolves: disruptive ideas destroy older structures but create higher productivity, new markets, and long‑term economic growth. Key takeaways * Creative…

Covered Interest Rate Parity (CIRP) Covered interest rate parity (CIRP) is a no-arbitrage condition linking interest rates, spot exchange rates, and forward exchange rates between two currencies. It states that after hedging foreign-exchange exposure with a forward contract, investors cannot earn a riskless profit by borrowing in one currency and investing in another. Key takeaways…

Covered Call A covered call is an options strategy where an investor sells (writes) call options while owning the underlying shares. The seller collects the option premium as income and must deliver the shares at the strike price if the option is exercised. This strategy is typically used when an investor expects the stock to…

Coverage Ratio: Definition, Types, Formulas, and Examples What is a coverage ratio? A coverage ratio measures a company’s ability to meet its financial obligations—primarily interest and debt payments—using its earnings or assets. These ratios help investors, creditors, and analysts assess long-term solvency and the risk of default. Key points: * A high coverage ratio suggests…

What Is a Cover Letter? A cover letter is a one-page document that accompanies your resume to introduce yourself, explain your interest in a specific role, and highlight why you’re a good fit. It complements—not repeats—your resume by giving context to key accomplishments, demonstrating fit with the company, and showing your communication skills. Key Takeaways…

Covenant What is a covenant? A covenant is a formal agreement that specifies actions parties must take or refrain from taking. Covenants appear across finance, property, law, and religion. In commercial settings—especially loans and bonds—covenants protect lenders and other stakeholders by setting financial or operational limits. In property law, they govern land use. In religion,…

Covariance: Definition, Formula, Types, and Examples What is covariance? Covariance is a statistical measure of how two random variables move together. In finance, it typically describes how the returns of two assets change in relation to one another: – Positive covariance: the assets tend to move in the same direction. – Negative covariance: the assets…

Coupon Rate What it is The coupon rate is the nominal annual interest rate a bond issuer promises to pay bondholders. It is expressed as a percentage of the bond’s par (face) value and determines the periodic cash interest payments received until the bond matures. Once set at issuance, the coupon rate does not change….

Countertrade: Definition, Types, and Examples Countertrade is a reciprocal form of international commerce in which goods or services are exchanged for other goods or services instead of being paid for in hard currency. It is often used when one or both trading partners face foreign-exchange shortages, limited credit access, or restrictive balance-of-payments positions. Countertrade can…

Counterparty Risk: Definition, Types, and Examples What is counterparty risk? Counterparty risk (also called default risk) is the likelihood that one party in a financial transaction will fail to meet its contractual obligations. It applies across lending, investing, and trading activities and affects lenders, investors, insurers, and any party exposed to another’s performance. Key points…

Counterparty: Definition, Types, and Risk A counterparty is the other participant in any financial transaction. For every buyer there is a seller; every trade or contract requires at least two parties. Counterparties can be individuals, businesses, governments, banks, market intermediaries, or other organizations. Key takeaways * A counterparty is simply the entity on the opposite…

Counteroffers: Definition, How They Work, and Practical Strategies A counteroffer is a response that rejects an initial offer and presents a new set of terms for consideration. It’s a common element of negotiations across real estate, employment, vehicle sales, mergers and acquisitions, and many other transactions. Counteroffers keep negotiations alive by reshaping price, timing, or…

Cottage Industry: Definition and Overview A cottage industry is a small-scale manufacturing or production operation typically run from a home by an individual or family. These businesses require minimal startup capital, are labor-intensive, and often produce handcrafted or niche products. Cottage industries remain important sources of income—especially in rural areas and developing economies—where they supplement…

Cost-Volume-Profit (CVP) Analysis What CVP Analysis Is Cost-Volume-Profit (CVP) analysis examines how changes in sales volume, prices, and costs affect a company’s operating profit. It helps determine the breakeven point and the sales required to reach target profits by using contribution margin concepts. Key formulas Contribution margin per unit = Sales price per unit −…

Cost-Push Inflation Cost-push inflation occurs when overall prices rise because the costs of production increase and businesses pass those costs on to consumers. It is driven by higher input costs—such as raw materials, wages, taxes, or disruptions to supply—rather than by stronger consumer demand. Key takeaways Cost-push inflation is caused by rising production costs that…

Cost-Plus Contract Definition A cost-plus contract (also called a cost-reimbursement contract) is an agreement in which a project owner reimburses a contractor for allowable project costs and pays an additional amount for the contractor’s profit, typically expressed as a fixed fee or a percentage of costs. How it works The contractor documents and submits invoices/receipts…

Cost Per Thousand (CPM) Cost per thousand (CPM) is a digital advertising metric and pricing model that expresses the cost an advertiser pays for 1,000 ad impressions. It’s commonly used to buy and measure awareness-focused campaigns where visibility—rather than immediate clicks or conversions—is the primary goal. What CPM means CPM = cost per 1,000 impressions….

Cost Per Click (CPC): Definition, How It Works, and How to Optimize What is CPC? Cost per click (CPC), also called pay-per-click (PPC), is an online advertising pricing model where advertisers pay only when a user clicks their ad. CPC focuses on direct engagement and driving traffic, in contrast to cost per mille (CPM), which…