Amortizing Bond
Quick Definition
A bond that repays both principal and interest over its life through regular payments, rather than returning all principal at maturity.
What Is Amortizing Bond?
An amortizing bond gradually repays the principal amount along with interest payments throughout the bond's life, unlike a bullet bond that returns all principal at maturity. Each periodic payment includes both an interest component and a principal reduction component, similar to how a mortgage works. As the outstanding principal decreases over time, the interest portion of each payment shrinks while the principal portion grows. This structure reduces the bondholder's reinvestment risk and credit risk because capital is returned incrementally rather than in one lump sum at the end. Mortgage-backed securities are a common example of amortizing bonds. The weighted average life (WAL) is a key metric for amortizing bonds, as it measures the average time until principal is repaid and is typically shorter than the stated maturity.
Amortizing Bond Example
- 1A 10-year amortizing bond with $100,000 face value might repay $10,000 of principal each year plus declining interest
- 2Mortgage-backed securities are the most common type of amortizing bond in the market
Related Terms
Mortgage-Backed Security (MBS)
A bond-like investment created by pooling mortgage loans and selling shares of the cash flows to investors.
Maturity Date
The date on which a bond's principal (face value) is repaid to the investor and interest payments cease.
Coupon Payment
The periodic interest payment made to bondholders, typically paid semiannually based on the bond's stated coupon rate and face value.
Par Value
The face value of a bond, typically $1,000, representing the amount repaid to the bondholder at maturity.
Bond
A fixed-income debt security where investors loan money to an issuer in exchange for regular interest payments and return of principal at maturity.
Treasury Bond (T-Bond)
A long-term U.S. government debt security with a maturity of 20 or 30 years, paying semiannual coupon interest.
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