- Amortizing loan
In

banking andfinance , an**amortizing loan**is a loan where the principal of the loan is paid down over the life of the loan, according to someamortization schedule , typically through equal payments.Similarly, an

**amortizing bond**is a bond that repays part of the principal (face value ) along with the coupon payments. Compare with asinking fund , which amortizes the total debt outstanding by repurchasing some bonds.Each payment to the lender will consist of a portion of interest and a portion of principal.

Mortgage loan s are typically amortizing loans. The calculations for an amortizing loan are those of an annuity using thetime value of money formulas, and can be done using anamortization 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.**Effects**Amortization of debt has two major effects:;Credit risk: First and most importantly, it substantially reduces the

credit risk of the loan or bond. In abullet loan (orbullet bond ), the bulk of the credit risk is in the repayment of the principal at maturity, at which point the debt must either be paid off in full or rolled over. 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 andcoupon rate . This is because there are smaller payments in the future, so the weighted-average maturity of the cash flows is lower.**Weighted-Average Life**The

weighted average of the times of the principal repayments of an amortizing loan is referred to as theweighted-average life (WAL), also called "average life". It's the average time until a dollar of principal is repaid.In a formula,:$ext\{WAL\}\; =\; sum\_\{i=1\}^n\; frac\; \{P\_i\}\{P\}\; t\_i,$where:

* $P$ is the principal,

* $P\_i$ is the principal repayment in coupon $i$, hence

* $frac\{P\_i\}\{P\}$ is the fraction of the principal repaid in coupon $i$, and

* $t\_i$ is the time from the start to coupon $i$.**ee also***

Amortization calculator

*Amortization schedule

*Amortization (business)

*Sinking fund

*Weighted-Average Life **References****External Links**[

*http://abe5.com/88d Amortizing Loan*]

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