Interest Expense

  

Categories: Bonds, Tax

See: Interest Cost. Same idea, with the little subtle tweak here that an expense is more accountant-ish speak, and screams the fact that interest costs are tax-deductible just like any other business expense, more or less.

So, uh, woot to tax deductibility. Neener neener, IRS.

Related or Semi-related Video

Finance: What is interest?20 Views

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]

Up Next

Finance: How Are Interest Rates Determined?
676 Views

How are interest rates determined? In short, the Federal Reserve plays the main role in determining interest rates. To do this, they use informatio...

Finance: What is the inverse relationship between interest rates and bond values?
75 Views

The inverse relationship refers to the fact that as interest rates go up, bond prices go down, and vice-versa. Bottom line reason is supply and dem...

Finance: What is Accrued Interest?
42 Views

What is Accrued Interest? Most bonds pay interest on a fixed calendar schedule, which can be quarterly, bi-annually, or annually. The interest earn...

Find other enlightening terms in Shmoop Finance Genius Bar(f)