Business and Personal Finance Dictionary

# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z 

• AMORTIZATION
  
  1. The process of making regular, periodic decreases in the book or carrying value of an asset. For example, when a bond is purchased at a price above 100, the difference between the purchase price and the par value, the premium, is amortized. Premiums are usually amortized in roughly equal amounts that completely eliminate the premium by the time that the bond has matured or by the call date, if applicable. 2. Liquidation of a loan or security by means of periodic reductions. The principal amount of loans is amortized by the periodic, usually monthly, payment of a fraction of the principal calculated to repay the entire amount of principal due by the date of the last scheduled periodic payment. Amortization methods differ based upon the type of loan. Mortgage loans and securities usually have level payments of principal and interest. For such amortizations, the interest consumes most of the early payments and, therefore, principal amortization increases as the loan ages. Many business loans use a level amortization with roughly equal principal reductions from each periodic payment.
  
  Back