Introduction to Finance

Risk-free rate of interest
The combination of 
real rate of interest and the infl ation premium, 
which in the United States is represented by U.S. 
Treasury debt instruments or securities
Round lot
Sale or purchase of 100 shares
Rule of 72
A shortcut method used to approx-
imate the time required for an investment to 
double in value 
Savings
Occur when all of an economic 
unit’s income is not consumed and are repre-
sented by the accumulation of cash and other 
fi nancial assets
Savings and loan associations (S&Ls)
Accept individual savings and lend pooled 
savings to individuals, primarily in the form of 
mortgage loans, and to businesses
Savings banks
Accept the savings of indi-
viduals and lend pooled savings to individuals, 
primarily in the form of mortgage loans
Savings defi cit
Occurs when an economic 
unit’s direct investment in real assets exceeds 
current income 
Savings surplus
Occurs when an economic 
unit, such as individuals taken as a group, has 
cur rent income that exceeds its direct invest-
ment in real assets
Savings-investment process
Involves the 
direct or indirect transfer of individual savings 
to business fi rms in exchange for their debt or 
stock securities
Secondary markets
Physical locations or 
electronic forums where debt (bonds and mort-
gages) and equity securities are traded
Secondary reserves
Short-term securities 
held by banks that are quickly converted into 
cash at little cost to the banks
Secured lending (asset-based lending)
Col-
lateral or security backing the loan that can be 
claimed or sold by the lender if the borrower 
defaults
Secured loan
Loan backed by collateral

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GLOSSARY