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 an Accumulated Dividend...9 Views
finance a la shmoop what is an accumulated dividend okay you know what
a dividend is companies generally commit to paying it when they have so much [Example of dividend meaning on a 100 dollar bill]
extra cash profit that they really don't know what to do with the dough yeah nice
place to be in the case of a preferred stock the dividends aren't just a
optional-ish they operate more like bond interest only with a catch
that is dividends on preferred stock can in fact be halted without the company
being repossessed by the debt holders like in the case where the company falls [Prize wheel lands on hard times]
on hard times or it wants to preserve its cash to buy a competitor or it just
wants another jet with a water slide thing on it well yeah it can halt its [Person slides down a jet slide]
dividend in those cases and well there are two types of preferred stock in this
realm the ones that pay cumulative dividends and the ones that don't
cleverly named non-cumulative say a company has halted dividends from its
preferred for three and a half years and it was paying five bucks a quarter in [Dividend distribution graph]
dividends from those cumulative preferred well if it was to resume
paying dividends on them it would first have to pay all back fourteen quarters
worth of dividends before it began to issue more dividends or pay them to its
preferred holders that is it owed three years times four quarters or twelve
quarters plus half a year or two quarters for a total of fourteen
quarters at five bucks a quarter a share that's five times fourteen or seventy [Formula of non-cumulative dividends]
dollars a share in back cumulative dividends big obligation but it has to
pay that amount before it can resume dividend payments why would a company
have a cumulative feature in its preferred dividend obligation well
because investors forced it to do so or they wouldn't invest they were worried [Person swipes away stacks of money]
that the preferred dividends might be just some merrily stopped and then the
investors would have little or no return on their investment in the preferred and
this can be a problem for companies that have fallen on hard times they are
essentially made illiquid in that they can't afford to pay the back dividends [Example of illiquid meaning]
on the preferreds and they can't raise more capital with this blight on their
record of having stopped paying a divvy well most [Non cumulative stock stickers appear on a table]
furred stocks are non-cumulative and if companies decide to just stop paying
them they can but if they do it's kind of like they've reneged on a handshake [Two guys giving a handshake]
and you know investors talk so like good luck to the company ever trying to raise
capital again from the cold cruel outside world yeah welcome to Wall
Street [Wall Street road sign]
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