Author: Hema Ailawadi

A raft or mat foundation is one big slab of concrete that supports an entire building. Raft foundations are used when the soil is too weak to support individual footings or when the building is very large. Individual footings are also used for all four walls of a building if the soil is very soft or there is a high water table. Helical piers operate on the same principle as concrete piers, except the piers are made of metal shafts called piles.

Strip footings ensure load distribution is spread evenly along the structure’s periphery. These consist of long, slender columns driven or screwed deep into the ground. Pile foundations are employed to transfer building loads to deeper, more stable layers of soil or rock, bypassing weaker surface layers.

Caisson Foundations (Drilled Shaft Footings)

When you start your construction process, you may undergo several procedures and steps to ensure the structural stability of a building. Because the foundation is crucial when it comes to building construction, the foundation is referred to as the base, whereas the footing is its main component. Footing has its unique significance and characteristics when it comes to building a structure, ensuring its durability and longevity. This can be done by pouring concrete into the hole or by using pre-made blocks of concrete, stone, or brick. The footing must be level and must extend past the edges of the hole so that it can support the weight of the building. The foundation—even though we can’t see it after the building is finished—is the most important part of any construction design.

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• Advantages of Concrete Block Concrete blocks are more efficient compared to clay bricks while building a home.
• Isolated footings are usually larger and deeper, made to support the weight of a single column.
• With the EMI Calculator, you can get an estimate that will help you better plan your budget.
• They allow for safe construction on gradients by compensating for the angle of the slope, ensuring the structure remains stable and level over time.
• Combined footings help maintain structural balance when uneven loads or site constraints exist.

Proper foundation footing design is a legal requirement under most local and national building codes and must be signed off on by a structural engineer. To ensure the foundation is secure and dependable, each type of footing is selected according to the building’s design, the state of the soil, and the structural requirements. Spread footing offers a reliable foundation for individual posts footing in accounting or columns. As they are stronger and wider than strip footings, they are perfect for supporting larger walls or columns to prevent settlement. They are built in various shapes such as round, square, and rectangular. A continuous run of concrete provides foundational support along the lengths of load-bearing walls or alignments of columns.

The ACI typically prescribes more stringent strength and reinforcement requirements than the IRC. Adding water to a concrete mix (reducing the slump) can make it easier to work with, so it’s not uncommon for an unknowing homeowner or indifferent concrete contractor to do so. The problem is that adding water reduces the concrete’s strength and can result in cracking. Excavation trenches can often fill up with rain or ground water just before a pour, which is another source of excess water that will negatively affect the strength of a footing.

Building Foundations

A mat footing is a sizable slab of concrete that covers the entire foundation area of the building. It is frequently utilised for large structures and disperses the load equally across the ground. A combined footing is used when two or more columns are too near to one another for separate footings. Strip footings are used to support a long foundation wall, such as the side of a house. They are also used to support load-bearing walls that run parallel to each other. Footings in construction are critical, as the footing distributes the weight of the building evenly across the entire structure so that it doesn’t sink into the ground.

The local building-code official will know the required minimum frost depth for the footing. This frost depth is defined as the minimum distance between the bottom of the footing and the proposed grade. If wet, absorbent soil is allowed to freeze under a footing, the soil will expand and likely cause the footing to be lifted, along with the portions of the house above it. I’ve seen homes built with full-depth basements converted into walk-out basements, which exposed the footings to ground-frost conditions. In this instance, the footing at the newly formed walk-out elevation heaved upward, causing drywall to crack and doors and windows to jam.

FORMED FOOTING

Building footings is usually the first step in construction after the excavation is complete. The hole for the footing must be dug first, and then the footing itself must be created. Building a trench footing is as simple as scraping off the topsoil, digging a trench, adding rebar, and filling the trench with concrete. Drainage patterns, vegetation, and proximity to neighboring structures also impact where and how footings can be placed. Designing and constructing a footing isn’t as simple as pouring concrete into a hole. By adhering to code, builders not only meet legal obligations but also ensure that the structure is safe for occupancy and built to last.

The role of rebar

This type of footing is ideal for poor soil conditions or structures with closely spaced columns and heavy loads. By spreading the weight across a large area, raft footings reduce pressure on the soil and help prevent differential settlement. That’s why there are several types of footings, each designed to accommodate specific building loads, environmental conditions, and site constraints. By evenly distributing the structure’s load, footings in construction prevent excessive settlement or sinking of buildings. This is especially critical in areas with soft or unstable soils, where without proper footings, buildings might tilt, crack, or collapse.

Proper footing construction requires more than just concrete and rebar — it demands thoughtful design, qualified engineering input, and strict compliance with local building codes. Local building codes outline the minimum requirements for footing depth, width, materials, and placement. These regulations are in place to ensure structural safety and maintain uniform standards. Strip footings are long, continuous slabs of concrete that support load-bearing walls. They distribute the wall’s weight evenly along its length and are common in buildings made with masonry or poured concrete walls.

GRAVEL FOOTING

• A frost-protected shallow foundation (FPSF) is a monolithic slab that is protected with insulation against the heaving effects produced by the freeze-thaw cycles in colder climates.
• Because concrete is very poor at resisting these tension forces, steel reinforcement bar, or rebar, is added for strength.
• The footing is one of the most critical yet often overlooked components of a building’s support system.
• They ensure that these elements are securely anchored and aligned, which is essential for the overall structural integrity.

The construction of footings is best left to the pros that can assess the soil conditions and decide on the proper depth and width for the footings as well as the proper placement. The dimensions of footings also depend on the size and type of structure that will be built. Placement of footings is crucial to provide the proper support for the foundation and ultimately the structure.

Understanding these advanced concepts is crucial for anyone navigating the fixed-income markets. The yield curve is not just a line on a chart; it is a dynamic entity that reflects the collective heartbeat of the global economy. By appreciating the role of non-linearities, market participants can better anticipate and react to the ever-changing landscape of interest rates. From the perspective of a portfolio manager, convexity is a double-edged sword. On one hand, a bond with high convexity will be less affected by interest rate increases, which can protect the portfolio. On the other hand, it also means that the bond will exhibit greater price increases than a bond with lower convexity when interest rates fall, which can be beneficial in a declining rate environment.

Q1. Is bond convexity good or bad?

It also contains periodic ‘fixed’ interest payments that are usually paid annually (e.g., France or Germany) or semi-annually (e.g., the US) at a predetermined coupon rate. This diagram summarizes the process starting from identifying bond characteristics to incorporating convexity measures into broader portfolio management strategies. This methodology provides an accurate gauge of how bond prices will react to interest rate changes beyond the first-order effects captured by duration. From the perspective of a portfolio manager, non-linearities can be both a hazard and an opportunity.

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Pu and Pd represent bond prices after downward (y − Δy) and upward (y + Δy) shocks to interest rates (yield to maturity) respectively. These facts highlight the importance of considering the benchmark yield when analyzing the behavior of bonds with embedded options. By understanding how the benchmark yield affects the bond’s value, you can better estimate the effective convexity of the bond. This formula shows how to calculate the convexity adjustment, which adds to the linear estimate provided by duration alone to bring the adjusted estimate close to the actual price on the curved line. (c) Calculate the estimated convexity-adjusted percentage price change resulting from a 100 bp increase in the yield-to-maturity. Convexity can be a complex concept to understand, but there are many resources available to help you master it.

How to Use Convexity to Hedge Bond Portfolios Against Interest Rate Risk?

Note that the duration of all bonds approaches 0 when the maturity date gets near, with the exception of long-term discount bonds. For these bonds, the duration increases as the bond approaches the maturity date. Bonds with higher duration and convexity have a higher convexity adjustment, which indicates higher risk. When interest rates fall, issuers may redeem the bond early, capping its price rise. Where $D$ is the modified duration of the bond and $C$ is the modified convexity of the bond. Convexity is a good thing because the price of a more convex bond appreciates more than a less convex bond when yield decreases and it depreciates less than the less convex bond if yield increases.

In this section, we will delve into the world of convexity, exploring what it is and why it matters. We will provide insights from different points of view, including that of bond issuers, investors, and portfolio managers. We will also discuss how convexity affects bond prices and why it is important to consider when managing fixed-income portfolios.

Unlocking Bond Investments: The Risks of Negative Convexity

The bond’s Macaulay duration of 4.23 years tells you that the bond’s cash flows are equivalent to receiving a single payment of $1,000 in 4.23 years. The bond’s effective duration of 4.07 is equal to the modified duration because the bond does not have any embedded options or other features that would affect its cash flows. A bond is said to have a negative convexity if there is an increase in its duration as its yields increase. That is, there will be a decline in the bond price by a greater rate when there is a rise in yields than if yields had fallen.

• Convexity is a good thing because the price of a more convex bond appreciates more than a less convex bond when yield decreases and it depreciates less than the less convex bond if yield increases.
• (c) Calculate the estimated convexity-adjusted percentage price change resulting from a 100 bp increase in the yield-to-maturity.
• The bond with higher convexity will gain more in price when interest rates fall and lose less when rates rise.
• The convexity adjustment formula is not a perfect predictor of future returns, but it is an important tool for investors who are looking to manage their risk.

Access daily AI-powered content with highlights from our industry-leading research, reports and market data to help you make more informed decisions. For small changes in YTM, the difference between the curved line and the straight line is negligible. However, as the change in YTM grows larger, the difference becomes significant. Convexity adjustment aims to quantify the difference between the price of a risky bond and the price of a risk-free bond. “Investments in debt securities/municipal debtsecurities/ securitised debt instruments are subject to risks including delay and/ or default in payment. As a result, bonds issued by governments are almost always used as the benchmark bond.

Conversely, the lower the convexity, the worse the bond quality, as it means the bond is more sensitive to interest rate risk. First, the bond price predictions using duration are better for smaller changes in yields. In other words, the difference between the actual and predicted prices increases with larger yield changes. Second, the duration prediction is symmetric – the predicted price adjustments for decreasing and increasing yields are the same.

• Convexity tells you how much the bond price will change for a large change in interest rates, or for a change in interest rates that varies across different maturities.
• Investors are also concerned with convexity because it affects the value of their portfolios.
• Bond convexity is a measure of how sensitive the price of a bond is to changes in interest rates.
• In this section, we will explain how to calculate convexity of a bond using a formula, and what it means for bond quality assessment.

In the bond world, convexity is simply defined as a measure of the sensitivity of the bonds duration to change its yield. Convexity is believed to be a good measure for bond price changes that are accompanied by greater fluctuations in their interest rates. Mathematically, convexity is the second derivative of the formula for change in bond prices with a change in interest rates and a first derivative of the duration equation.

The Ultimate Guide to Bond Convexity for Investors

Suppose the investor has a position in the bond with a par value of USD50 million, and the yield-to-maturity increases by 100 bps. Where $P$ is the bond price, $C$ is the annual coupon payment, $F$ is the face value, $y$ is the yield to maturity, and $n$ is the number of periods. From this post, we have understood the meaning of convexity by using an simple derivation and Excel illustration. Finally owing to derivmkt R package, we can easily implement R code for the calculation of convexity not convexity formula to mention duration and price of a bond.

Typically, the lower the sensitivity/duration, the less changes in the interest rate will affect your PnL. As a rule of thumb, dividing duration by the change in yields will give an approximate impact on profitability. For the period that they do hold a bond, they will receive their coupon payments.

Visualizing Bond Convexity

The fall in duration represents a fall in the bond risk – we have become less exposed to interest rate changes. In principle, duration is lower for (i) a shorter maturity date, (ii) a higher coupon rate, and (iii) a higher yield. In the above example, an investor is said to be fully exposed to interest rate changes – any interest rate change will impact your entire cashflow. Most bonds pay regular coupons, which means part of the bond’s value is banked over time, reducing the bond’s exposure to interest rate changes. Many require an understanding of compound interest, present values, discounting, and differential calculus.

Costs such as utilities, rent, insurance, or supplies are unavoidable and relatively fixed. Gross profit is dictated by net revenue and cost of goods sold, so a company can strategically adjust more elements of gross profit than it can for net profit. While you’ll always use the same formula to calculate gross profit, measuring profitability is more fluid, and you can express it in multiple ways.

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Various other costs and expenses can be included if they are variable and directly related to the company’s output of products and services. Gross profit isolates a company’s performance of the product or service it sells. Removing the “noise” of administrative or operating costs allows a company to think strategically about product performance and to implement cost control strategies more effectively. It can be limiting since it only takes into account the profitability from COGS and not additional relevant data, such as rising material costs or labor shortages.

Gross Profit Definition

Moreover, tracking changes in gross profit margins over time can provide valuable insights into a company’s operational efficiency and market competitiveness. If the gross profit margin is increasing, it may indicate that the company is managing its production costs more effectively or achieving higher sales prices for its products. However, a declining gross profit margin could signal rising costs or falling sales prices, which may necessitate strategic adjustments. Gross profit and EBITDA are both profitability metrics, but they measure different parts of a business’s financial performance. While gross profit evaluates product-level margins, EBITDA is often used to assess overall operational performance and cash flow potential.

Below is a break down of subject weightings in the FMVA® financial analyst program. As you can see there is a heavy focus on financial modeling, finance, Excel, business valuation, budgeting/forecasting, PowerPoint presentations, accounting and business strategy. Sales revenue or net sales is the monetary amount obtained from selling goods and services to customers – excluding merchandise returned and any allowances/discounts offered to customers. Investors view consistent gross profit growth as a sign of financial stability, which can positively impact stock prices. The use of a gross profit calculator gives basis for the calculation of net profit. However, these two terms appear most often while determining the profitability of an organization.

COGS (cost of goods sold) includes all of the costs Garry incurred in manufacturing and selling his sunglasses—including production and direct labor costs and material costs. After reviewing his expenses for the year, Garry determined his COGS is $650,000. Gross profit serves as the financial metric used in determining the gross profitability of a business operation. It shows how well sales cover the direct costs related to the production of goods.

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As of the first quarter of business operation for the current year, a bicycle manufacturing company has sold 200 units, for a total of $60,000 in sales revenue. However, it has incurred $25,000 in expenses, for spare parts and materials, along with direct labor costs. As a result, the gross profit declared in the financial statement for Q1 is $34,000 ($60,000 – $1,000 – $25,000). Companies strive for high gross profit margins because they indicate greater degrees of profitability. It means that a company operates efficiently when it has a higher profit margin.

To understand the gross profit formula, meet Sally, the owner of a small business named Outdoor Manufacturing. Sally’s business manufactures hiking boots, and her firm just completed its first year of operations. Subtract the calculated COGS or COS from the Net Revenue to arrive at the Gross Profit. The result represents the profit generated from the company’s core operations before considering other Operating Expenses.

• The same split also applies to cost of goods sold, which is labeled cost of revenue in this case.
• A retailer may have thousands or even millions of dollars in inventoriable costs that are not yet expensed.
• These are fixed costs and, as such, aren’t included in the gross profit formula.
• The cost of goods sold is the added up cost of materials, labor, and other things that are variable based on the amount of product or service that the company makes.
• Accordingly, Sage does not provide advice per the information included.

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Gross profit plays a pivotal role in financial analysis by serving as the foundation for another critical metric known as the gross profit margin. This metric is essential for assessing a company’s production efficiency over different time periods. It’s important to note that merely comparing gross profits from year to year or quarter to quarter can be deceptive, as gross profits may increase while gross margins decline.

Continue reading to learn more about gross profit and how to calculate it. In our coffee shop example above, the gross profit was $80,000 from revenue of $200,000. The more product made or service rendered, the higher the cost of revenue. You’ll have your Profit and Loss Statement, Balance Sheet, and Cash Flow Statement ready for analysis gross profit definition each month so you and your business partners can make better business decisions. AccountsBalance is a monthly bookkeeping service specialized for agencies & SAAS companies. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.

The caveat is that gross profit disregards some additional expenses the company incurs, like operating costs. Net profit fills in these gaps by accounting for all business expenses. Understanding gross profit will help Sally assess the core profitability of the products after accounting for production costs. Put simply, gross profit helps you get a more accurate picture of how well your business is maintaining its production profit margins.

Formula for Calculating Gross Profit

For example, a low gross profit in a service company with minimal cost of goods sold might not necessarily indicate poor performance. For 2017, by taking net sales of $177.9 billion and subtracting operating expenses of $173.8 billion, you will arrive at the operating income of $4.1 billion. Then, to get to the bottom line, subtract from the amount of interest, taxes, and any other expenses to arrive at the net income of $3.0 billion. It can impact a company’s bottom line and it means that there are areas that can be improved.

• Even though the company is efficient at producing its goods or services, these additional costs can reduce overall profitability, leading to a low net profit.
• Whereas gross profit is the sum of how much a business profits after deductions are accounted for.
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• As we’ve previously discussed, gross profit is an indicator of a firm’s profitability but disregards some additional expenses the company incurs like operating costs.
• Then divide this figure by net sales to calculate the gross profit margin as a percentage.

Smaller businesses may choose to calculate gross profit monthly so they can adapt more quickly. The right expense-tracking software can help you catch costly production components that may impact your gross profit. Expense tracking software makes it easy to record and organize all your business expenses so you can reduce costs and improve your gross profits. Try FreshBooks free to get started tracking expenses and grow your small business today. Learn more about how to calculate gross profit margin and its relevance to your business. Gross profit and operating profit both show how much money a company is making, but they tell different parts of the story.

Gross profit is the amount of money a business makes after deducting the cost of goods sold from the total revenue. Since there are no direct production costs involved, the gross profit is equal to the revenue generated from consulting services. Gross profit margin shows the money a company makes after accounting for its business costs. This metric is usually expressed as a percentage of sales and is also known as the gross margin ratio. A typical profit margin falls between 5% and 10% but it varies widely by industry.

How can a company improve its gross profit margin?

After operating profit, investors calculate net profit, otherwise known as net income. Net income is operating profit minus all non-operating expenses such as taxes and interest. Gross profit is a company’s total profit after deducting the cost of doing business, specifically its COGS. Gross profit margin measures a company’s profit after subtracting its costs of doing business. The most effective way to bolster total sales revenue is to increase sales to your existing customer base.

A business might buy or build an office building and use it for many years. The original office building may be a bit rundown but it still has value. The cost of the building minus its resale value is spread out over the predicted life of the building with a portion of the cost being expensed in each accounting year. Assets that are expensed using the amortization method typically don’t have any resale or salvage value. In contrast, a variable rate schedule involves an interest rate that may change based on market conditions or a benchmark rate.

Accounting Impact of Amortization

Your decision between fixed and variable should align with your risk tolerance and forecast of interest rate trends. We provide third-party links as a convenience and for informational purposes only. Intuit does not endorse or approve these products and services, or the opinions of these corporations or organizations or individuals. Intuit accepts no responsibility for the accuracy, legality, or content on these sites.

These loans, which you can get from a bank, credit union, or online lender, are generally amortized loans as well. They often have three-year terms, fixed interest rates, and fixed monthly payments. A loan doesn’t deteriorate in value or become worn down through use as physical assets do.

With ARMs, the lender can adjust the rate on a predetermined schedule, which would impact your amortization schedule. They sell the home or refinance the loan at some point, but these loans work as if a borrower were going to keep them for the entire term. These are often five-year (or shorter) amortized loans that you pay down with a fixed monthly payment. To see the full schedule or create your own table, use a loan amortization calculator. The sum-of-the-years digits method is an example of depreciation in which a tangible asset such as a vehicle undergoes an accelerated method of depreciation. A company recognizes a heavier portion of depreciation expense during the earlier years of an asset’s life under this method.

It then breaks down each payment across the term into interest and principal portions. This schedule illustrates how each payment reduces the principal and how much interest is paid over time. Amortization can help small businesses manage large expenses by spreading out the cost over a period of time. Amortizing allows businesses to possess more income and assets on the balance sheet and entitles businesses to a tax deduction for as long as the asset is in use. Consider a business that takes out a $100,000 loan with a 5% interest rate to be paid back over 10 years. Amortization is a technique to calculate the progressive utilization of intangible assets in a company.

• A type of loan or debt financing that is paid back to the lender within a specified time.
• Alternatively, a borrower can make extra payments during the loan period, which will go toward the loan principal.
• Here we shall look at the types of amortization from the homebuyer’s perspective.
• A company recognizes a heavier portion of depreciation expense during the earlier years of an asset’s life under this method.

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Amortization is a certain technique used in accounting to reduce the book value of money owed, like a loan for example. It can also get used to lower the book value of intangible assets over a period of time. However, the rules and regulations regarding the tax deductibility on these expenses differ between jurisdictions depending on the asset’s nature. For example, some countries allow this deduction for specific intangible asset types like patents or copyrights, while others may have more specific criteria or restrictions on these tax deductions.

• Tangible assets that depreciate include things like buildings, machinery, and vehicles.
• For example, if you take out a mortgage then there would typically be a table included in the loan documents.
• Through amortization, the company will expense $5,000 annually as an amortization expense, smoothly distributing the cost over the patent’s useful life.

What are the benefits of amortizing a loan?

The loan schedule consists of a down payment and periodic payments of interest+principal. An amortized loan is a scheduled loan in which periodic payments consist of interest amount and a portion of the principal amount. To accurately record the periodic payment of an intangible asset, make two entries in the company’s books.

We’ve already discussed how to calculate the monthly installments in loan amortization and the amount of monthly interest. Personal loans were taken from online lenders, credit unions, and other financial institutions like banks fall in the category of personal loans and are usually amortized. This content is for information purposes only and should not be considered legal, accounting or tax advice, or a substitute for obtaining such advice specific to your business.

You theoretically gain free equity with each payment, which is almost the opposite of amortization of intangible assets, where the remaining value is lost with each passing term. Amortization is the way loan payments are applied to certain types of loans. Amortizing a loan provides predictable monthly payments, which helps in budgeting and financial planning. It reduces the principal over time, decreasing interest costs in the long run and ensuring full repayment by the loan’s end. It helps manage debt repayment and calculate asset value over specified periods. Amortization plays a pivotal role in commercial real estate financing by determining how the cost of a property or loan is spread over time.

At the end of the amortization schedule, there is no amount due on the borrower. There are specific types of loans that are amortized and other types that are not amortized. This article will have a general overview of loan amortization, how it works, and what types of amortized, and which ones are not. However, for some, these loan payments happen over a long period — it can be a very slow and drawn-out process.

What is the Energy Amortization Period?

Loans are also amortized because the original asset value holds little value in consideration for a financial statement. The notes may contain the payment history but a company must only record amortization definition its current level of debt, not the historical value less a contra asset. The formulas for depreciation and amortization are different because of the use of salvage value.

Accounting Standard

Amortization refers to the process by which debts or financial liabilities are paid off in regular instalments over a certain period of time. Both the interest and part of the original loan amount (principal) are repaid. The aim of amortization is to repay the entire amount in full by the end of the term. In accounting, amortization can also describe the process by which the value of intangible assets, such as patents or licenses, is depreciated over their useful life. Loan amortization breaks a loan balance into a schedule of equal repayments based on a specific loan amount, loan term and interest rate. This loan amortization schedule lets borrowers see how much interest and principal they will pay as part of each monthly payment—as well as the outstanding balance after each payment.

The advantage of accelerated amortization for tax purposes lies in the deferment of taxes rather than in their reduction. A financial problem may result later from the absence of any deduction in the normal income taxes for depreciation. Income-tax expenses can be equalized, however, by treating taxes not paid in the early years as a deferred tax liability. Within the framework of an organization, there could be intangible assets such as goodwill and brand names that could affect the acquisition procedure. As the intangible assets are amortized, we shall look at the methods that could be adopted to amortize these assets. The IRS has schedules that dictate the total number of years in which tangible and intangible assets are expensed for tax purposes.

In general, longer depreciation periods include smaller monthly payments and higher total interest costs over the life of the loan. Understanding amortization in this context helps in managing cash flows, as it offers predictable monthly payments that cover both the principal and interest. It also aids in long-term strategic planning, allowing businesses to forecast when major expenses like refinancing or property upgrades will be viable. Loan amortization determines the minimum monthly payment, but an amortized loan does not preclude the borrower from making additional payments. Any amount paid beyond the minimum monthly debt service typically goes toward paying down the loan principal. This helps the borrower save on total interest over the life of the loan.

While this can potentially lead to lower payments if rates decrease, it also poses the risk of higher payments if interest rates climb. Variable schedules can be beneficial if you anticipate market rates will decline or if you want initially lower payments. In general, the word amortization means to systematically reduce a balance over time. In accounting, amortization is conceptually similar to the depreciation of a plant asset or the depletion of a natural resource. However, the service life could be considerably shorter than the legal life of an intangible asset.