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Define amortizationCharges made against the interest received on a debt in order to offset a premium paid for the debt. Thus, with each periodic payment, a debtor is not only paying back interest, but also part of his or her premium. This leads to higher periodic payments than in the case when only interest is paid out. However, a payment schedule which includes premium amortization makes debt management easier, especially if the principal is large. While paying just the interest each period will lead will lead to a low outflow of cash each month, the debtor might not save enough to pay the principal. Thus, amortizing the premium each period also reduces the credit risk of the debt, since the creditor gets some part of the principal each time period, as opposed to allowing a debtor to forfeit on all of it at the maturity of the loan. Amortization of premium is a common feature in cases when a person or company takes on a large amount of debt at one time, such as a mortgage.
Banking:
The payment of a loan by periodic payments of principal and interest, resulting in a declining principal balance and eventual repayment in full. This form of debt repayment is Level Payment Amortization. Other methods have repayment schedules in which the early loan payments don't fully cover the interest due (Negative Amortization ).
Even though level payment amortization calls for the same payment in every installment, the loan payments are divided unequally between principal balance and interest owed. In the early years of a 30-year mortgage, a higher portion of early loan payments goes toward payment of interest than reducing the principal ; as the loan is gradually paid down, an increasing portion of each payment is allocated to the Principal until a zero-balance is eventually reached..
Securities:
An accounting process for adjusting the book value of bonds purchased above Par Value to the face value. Compare to Accretion of Discount.
Accounting:
A gradual reduction in book value of patents and other intangible assets. The preferred term for writing off fixed assets such as equipment is Depreciation.
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