Amortization

Amortization (or amortisation; see spelling differences) is paying off an amount owed over time by making planned, incremental payments of principal and interest. To amortise a loan means "to kill it off".[1] In accounting, amortisation refers to charging or writing off an intangible asset's cost as an operational expense over its estimated useful life to reduce a company's taxable income.[2][1]

Etymology

The word comes from Middle English amortisen to kill, alienate in mortmain, from Anglo-French amorteser, alteration of amortir, from Vulgar Latin admortire "to kill", from Latin ad- and mort-, "death".

Applications of amortisation
  • When used in the context of a home purchase, amortisation is the process by which loan principal decreases over the life of a loan, typically an amortizing loan. As each mortgage payment is made, part of the payment is applied as interest on the loan, and the remainder of the payment is applied towards reducing the principal. An amortisation schedule, a table detailing each periodic payment on a loan, shows the amounts of principal and interest and demonstrates how a loan's principal amount decreases over time. An amortisation schedule can be generated by an amortisation calculator. Negative amortisation is an amortisation schedule where the loan amount actually increases through not paying the full interest.
  • In business, amortization allocates a lump sum amount to different time periods, particularly for loans and other forms of finance, including related interest or other finance charges. Amortisation is also applied to capital expenditures of certain assets under accounting rules, particularly intangible assets, in a manner analogous to depreciation.
  • In tax law in the United States, amortization refers to the cost recovery system for intangible property.
  • In computer science, amortised analysis is a method of analyzing the execution cost of algorithms over a sequence of operations.[3]
  • In the context of zoning regulations, amortisation refers to the time period a non-conforming property has to conform to a new zoning classification before the non-conforming use becomes prohibited. For example, if the city rezones property from industrial to residential and sets an amortisation period of one year, all property within the rezoned boundary must move from industrial use to residential use within one year.
  • In the context of Securitization the Joshua Curve relates to a unique amortisation profile that results in the innovative "horseshoe Shape" or "J Shape" weighted average life ("WAL") distribution. In other words, if the base case results in a WAL of 10.0 years, the stress case and performance case would both result in reduced WALs that are both less than 10.0 years due to accelerated amortisation.

See also

References
  1. "amortize". Merriam-Webster. Retrieved 12 July 2017.
  2. "amortization". BusinessDictionary. Retrieved 12 July 2017.
  3. Cormen, Thomas H.; Leiserson, Charles E.; Rivest, Ronald L.; Stein, Clifford (July 2009). "Chapter 17". Introduction to Algorithms (Third ed.). MIT Press and McGraw-Hill.
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Amortization
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