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Finance: What is interest? 20 Views
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Description:
What is interest? In order to create an incentive for a lender, a borrower usually repays debt with interest, a percentage of overpayment for the loan that gives the lender an agreed upon profit. Banks pay depositors interest for the use of their money. Corporations pay interest to investors who buy their bonds. Even the government pays interest to purchasers of US Treasury bonds and notes. The interest is often commensurate with the risk of default, so higher risk borrowers often have to pay higher interest rates for the opportunity to borrow.
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Transcript
- 00:00
finance a la shmoop. what is interest? well you know how common the catchphrase
- 00:08
that's interesting is used? why well because something of interest is something of [man stands in theme park]
- 00:15
value. right if it's interesting it's valuable to know. yeah that's where the
- 00:20
notion of interest came from. so financially speaking the thing of value
- 00:25
you have is your capital- your money- the dough you saved from mowing lawns all
Full Transcript
- 00:30
summer. and you can use that capital to make more capital for yourself without
- 00:36
having to you know mow more lawns. all right well how do you pull off this
- 00:40
magic? you invest your money and one interesting way to invest it in is in
- 00:47
bonds, which conveniently for this video pay interest. well interest is just rent
- 00:54
on the money you're loaning someone. and when you buy a bond you are the landlord,
- 00:58
right you're renting out your money to someone else, that is people will pay you
- 01:03
say 60 bucks a year to rent a thousand dollars from you the rate they're paying [kid rents money from a stand]
- 01:08
then is 6% a year to rent that lawn-mowing grant. and if you were buying
- 01:14
a formal publicly traded bond like the ones offered by say ATT or Comcast or
- 01:21
Time Warner and others, well you'd be paid your interest twice a year. that is
- 01:25
you'd get 30 bucks on June 30th and another 30 bucks just before New Year's
- 01:30
Eve, just in time to buy a bunch of those obnoxious noisemakers. and you'd collect
- 01:35
that interest until the bond says it'll pay you back your original amount called
- 01:40
principle. so if this were a ten-year bond paying 6% interest well your
- 01:45
little journey and renting your grand to AT&T would look like this - see you got
- 01:49
June 30 2020 collect 30 and then it goes December and during the design it goes I [interest shown on document]
- 01:54
don't know until you collect your thousand bucks. got it?
- 01:57
note how much interest you made from the grand you invested in that 6% bond. you
- 02:02
did nothing for 10 years just sitting on your fat butt watching the Cleveland
- 02:06
Browns lose football games, and you collected 30 dollars 20 times for a
- 02:11
total of 600 bucks in total interest, and then you got your grand
- 02:15
back. 600 bucks for doing well pretty much nothing a concept with which the
- 02:20
Cleveland Browns are oh so familiar. [man sleeps on couch holding cash]
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