amortization

amortization (ăm'ərtəzā`shən, əmôr`–), reduction, liquidation, or satisfaction of a debt. The term amortization may also refer to the sum used for that purpose. The term is commonly used in ascertaining the investment value of securities. Thus, if a security is bought at more than its face value (i.e., at a premium), a part of the premium is periodically charged off in order to bring the value of the security to par at maturity; if the security is bought at less than its face value, the discount is similarly charged off. Paying off a mortgage or any other debt by installments or by a sinking fund is amortization. Amortization by paying off a certain number of bonds each year is practiced by public corporations. National governments of limited credit as well as private companies commonly amortize by sinking funds. Governments with stronger credit usually refund debts by issuing new bonds. The satisfying of a debt by a single payment may be termed amortization. Amortization of a fixed asset refers to the depreciation of a nonmaterial investment over its estimated average life.

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amortization

In finance, the systematic repayment of a debt; in accounting, the systematic writing off of some account over a period of years. An example of the first meaning is a home mortgage, which may be repaid in monthly installments that include interest and a gradual reduction of the principal. Such systematic reduction is safer for the lender, since it is easier for the borrower to repay a series of small amounts than a single lump sum. In the second sense, a firm may gradually reduce the balance-sheet valuation of a depreciable asset such as a building, machine, or mine. The U.S. government has sometimes permitted accelerated amortization of assets, which encourages industrial development by decreasing a company's tax burden in the years immediately after a purchase.