amortization type definition
In business, amortization refers to spreading payments over multiple periods. The term is used for two separate processes: amortization of loans and assets. It's the average time until a dollar of principal is repaid. In a formula, where: 1  is the principal, 2  is the principal repayment in coupon, hence. 3  is the fraction of the principal repaid in coupon, and. 4  is the time from the start to coupon. By paying off the principal over time, this risk is mitigated. Interest rate risk. A secondary effect is that amortization reduces the duration of the debt, reducing the debt's sensitivity to interest rate risk, as compared to debt with the same maturity and coupon rate. A batch rate spread calculator is also available to allow institutions to calculate the rate spread on multiple Loan Application Registers (LARs). NOTE: Do not use the rate spread calculator to calculate the HOEPA status; they are two different fields which require two different calculations. Amortization of loans [edit]. In lending, amortization is the distribution of payment into multiple cash flow installments, as determined by an amortization schedule. Unlike other repayment models, each repayment installment consists of both principal and interest. where: P is the principal amount borrowed, A is the periodic amortization payment, r is the periodic interest rate divided by 100 (nominal annual interest rate also divided by 12 in case of monthly installments), and n is the total number of payments (for a 30-year loan with monthly payments n = 30 × 12 = 360). Payments are divided into equal amounts for the duration of the loan, making it the simplest repayment model. A greater amount of the payment is applied to interest at the beginning of the amortization schedule, while more money is applied to principal at the end. In banking and finance, an amortizing loan is a loan where the principal of the loan is paid down over the life of the loan (that is, amortized) according to an amortization schedule, typically through equal payments. Each payment to the lender will consist of a portion of interest and a portion of principal. Mortgage loans are typically amortizing loans. The calculations for an amortizing loan are those of an annuity using the time value of money formulas, and can be done using an amortization calculator. An amortizing loan should be contrasted with a bullet loan, where a large portion of the loan will be paid at the final maturity date instead of being paid down gradually over the loan's life.
It refers to spreading payments over multiple periods.