Well, you know how pervasively the catch phrase “Hmmm, that’s interesting” is used? Why? Because something of interest is something of value. Yeah, that’s where the notion of interest came from. So financially speaking, the thing of value you have is your capital…your money...the dough you saved from mowing lawns all summer. And you can use that capital to make more capital for yourself without having to, uh...mow more lawns.
How do you pull off this magic? You invest your money. And one interesting way to invest it is in bonds. Which, conveniently for this video, pay interest.
Interest is just rent on your money. And when you buy a bond, you are the landlord. That is, people will pay you, say, 60 bucks a year to rent a thousand dollars from you. The rate they are paying then is 6 percent a year to rent that lawn-mowing grand. And if you were buying a formal, publicly traded bond, like the ones offered by AT&T and Comcast and Time Warner and others, you’d be paid your interest twice a year. That is, you’d get 30 bucks on Jun 30 and another 30 bucks just before New Year’s Eve. Just in time to buy a bunch of those obnoxious noisemakers. And you’d collect that interest until the bond says it’ll pay you back your original amount, called principal. So if this were a 10-year bond paying 6 percent interest, note how much interest you'd make from the grand you invested in that 6% bond. You did nothing for 10 years, just sitting on your fat butt watching the Cleveland Browns lose football games, and you collected thirty dollars 20 times for a total of 600 bucks in total interest…and then you got your grand back.
600 bucks for doing pretty much nothing. A concept with which the Cleveland Browns are very familiar.
Related or Semi-related Video
Finance: What is Accrual Accounting?39 Views
Finance a la shmoop... what is accrual accounting? well there are two
religions in the way in which beans get counted the first is cash accounting [Cash accounting building]
which just tracks cash in the door and cash out the door in any given period [Cash enters door and exits]
the second is accrual accounting which tries to guess or impute the values
coming in and going out in a given firm hoping to give a true picture of how
well or poorly a company is performing financially and you might ask how cash
and accrual accounting can be different like aren't beans just beans that you
count well stay tuned here in accrual accounting you might have an obligation
like an employee bonus which you think is highly likely to be paid at the end [Employee happy at getting a bonus]
of the year almost treated like debt the employee makes 6 grand a month and is
very likely due 10 grand in bonus money at the end of the year it's payable on
December 31 that's when the cash would go out the door of the company but given [Cash exiting the door]
that it's highly likely to be paid or earned by the employee so they'd have a
legal claim on that 10 grand the company using accrual accounting would accrue
the liability labeled something like bonuses or or is it bony well something
like that bonus is payable.. and would accrue the
value of 10 grand divided by 12 because that's the number of months in a year in
California anyway or about 833 dollars a month throughout the year that's how you [Employee bonus divided by 12 months calculation]
would accrue for that likely bonus now promising an employee a bonus and not
giving it to them after they've earned it well that would be a cruel accounting [Person holds out cash to employee and takes it away]
a totally different thing and much more mean-spirited
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