A type of calendar showing the timing and breakdown of interest payments and principal repayments associated with a loan.
Let’s say Ebenezer loans $100 to Tim over 3 years at 20% annual interest. Ebbie’s banker would do some fancy math and determine that Tim will need to pay $47.47 each year to fulfill his obligation. At the end of Year 1, $20 of the $47.47 would be an interest payment and the remaining $27.47 would be principal repayment, taking the balance down to $72.53 ($100 - $27.47 = $72.53).
Then, in Year 2, 20% of that ($14.51) would be paid in interest with the balance of $32.97 ($47.47 - $14.51) repaying principal and so on, until the entire balance is repaid at the end of Year 3, right on (amortization) schedule.
Related or Semi-related Video
Finance: What is Bond Amortization?7 Views
Finance a la shmoop what is bond amortization? okay fancy term easy
concept the basic idea is that you have to "revalue" what a bond is
actually worth each period which usually means twice a year because bonds pay [Monthly calendar appears]
interest on the you know semester system yeah twice a year so let's say you've
paid seven hundred bucks for a bond with a 5% coupon which comes due for a
thousand bucks in ten years over that time you'll have received two things the
5% per year interest from the bond in cash paid along the way and the [5% interest per year appears]
appreciation of the 700 bucks to become the thousand dollar par value at which
point it will eventually pay back its principal so to amortize the $300 of
appreciation of that bond over ten years while you could attribute 30 bucks a
year in appreciation each year such that after we'll say three and a half years
you'd hold the bond as having appreciated 3.5 times 30 bucks or $105 [Straight line appreciation formula appears]
in appreciation making the bond worth at that point in time eight hundred five
dollars oh yeah fancy but also pretty easy
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