Corporate Debt versus Traditional Mortgages Understanding how most corporate debt is different than most personal mortgages
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- The type of debt that most of us are most familiar with
- are mortgages that we might take out on our homes.
- What I want to do in this video is clarify
- how a mortgage is different than the type of debt
- that many corporations would take on.
- So if I were to take out a $1,000,000 mortgage,
- what happens is that the bank figures out a fixed payment
- that I could pay
- really every month. And as I pay that payment,
- and that payment will not change over the course of
- the term of the mortgage, so maybe it's a 10 year mortgage,
- the payment, won't change, but as I pay that mortgage
- I pay some part of it is interest, and some part of it
- is actually paying down the mortgage.
- So early on in the life of the mortgage,
- maybe this is the first payment here
- most of the payment is going to be interest
- and a little bit of the mortgage is going to be
- the mortgage payment, is going to be principal.
- And when I say principal, that little pink part right there,
- that's actually being used to pay down the debt on the mortgage.
- So after this first payment, now the debt is a little bit less,
- I'm going to make the same total mortgage payment,
- but since the debt is now less, the total debt
- is now less, the amount, I'm taking the same interest rate
- I'm assuming it's a fixed interest rate here,
- but the amount of interest is going to be less
- 'cause I paid off a little bit of the principal already.
- So on the next payment, the amount of interest is going to be a little bit less
- and for that fixed payment
- that I'm making, I'm going to be able to give
- more principal. And we keep doing that.
- So we keep doing that, so I'm going to do that same color.
- So the next payment after that, no that's not the same color,
- the next payment after that
- even though it's the exact same payment,
- it's going to have less interest because I've paid down
- more of the debt now, so it's going to have less interest
- it normally doesn't happen this quickly,
- but hopefully this gives you the idea,
- and it's also going to have more principal.
- So that you fast forward all the way to near the end of the term
- so this is many payments later,
- means this is the end of the 10 years
- I think I said this was a 10 year mortgage loan
- on that last payment even though every
- payment was exactly the same amount,
- the mortgage payment was the same dollar amount every month,
- that last payment is going to be very little interest,
- and mostly principal. And then after that last payment
- you would, or if I'm that person taking out the mortgage loan,
- I would have paid off the loan. So Loan Paid Off.
- And I own the house outright, in a traditional fixed rate mortgage.
- With corporate debt, it's not always like that,
- in fact it's not usually like that. Corporate debt
- is usually interest only debt.
- And there might be some things where the corporation
- has to pay off certain amounts of the loan at certain times,
- but it isn't the model where you have a fixed payment
- and you pay off the debt over certain amount of time.
- Most corporate debt, let's say a corporation takes $1,000,000 in debt
- and let's say it's a 10 year loan as well,
- but the corporation is just going to pay the interest only
- Is going to pay the interest only the entire time.
- So whatever this amount was, roughly, is what the corporation
- will pay every month.
- So they'll pay exactly that much every time period,
- maybe every quarter, every year, whatever it might be
- and then you fast forward, you fast forward
- to the end of the term of the loan,
- so they continue paying that same amount,
- and at the end of the term of the loan
- they have to pay that amount, plus all of the principal
- at once. Plus all of the principal at once.
- Now, most companies won't have all of that principal sitting around
- so whatever it might be, they have to pay all of the principal
- at once at the end of the term of the loan.
- And, if they have the cash, they could pay off the loan,
- but if they don't have the cash,
- and most corporations would not have the cash
- in this situation, that's why they borrowed it in the first place,
- what they would do is they would take out a new loan
- so they would take out a new loan for the same amount of principal
- So they'll maybe to the same bank, maybe a different bank,
- but it might now have a different interest rate,
- different loan terms, whatever,
- so they'll now take out a new loan at the end of the term period
- Use that to pay the principal on their old loan,
- and then they'll continue paying interest for the term of this new loan,
- so it's a slightly different process,
- and I just wanted to make sure you understood that.
- And the other thing, this isn't all corporate debt,
- they can be fixed interest rate, floating interest rate,
- there's often things called covenants
- covenants that the bank will place on the corporation
- to make sure that the corporation isn't doing dangerous things
- that will make it less likely,
- that they'll eventually be able to pay off the debt
- or less likely they could eventually get a loan,
- to pay off the current loan,
- so it's, there are controls that the bank has
- to make sure that the company is good for this
- near the end of the term,
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At 5:31, how is the moon large enough to block the sun? Isn't the sun way larger?
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