ShmoopTube

Where Monty Python meets your 10th grade teacher.

Search Thousands of Shmoop Videos

See All

Finance: What is interest? 20 Views

Share It!

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.

Language:

English Language

Subjects:

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

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]
Full Transcript