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Amortized Bond

An amortized bond is a type of bond where the principal (face value) is gradually paid off to the bondholder over the life of the bond, rather than being repaid in full at maturity. Each payment includes both interest and a portion of the principal, similar to how a mortgage works. As a result, the outstanding balance of the bond decreases with each payment until it is fully paid off by the maturity date.

Example

If a company issues a 10-year amortized bond, the bondholder will receive regular payments that include both interest and principal, gradually reducing the outstanding principal until the bond matures.

Key points

• A bond where the principal is repaid gradually over the life of the bond.

• Each payment includes interest and a portion of the principal.

• Reduces risk for investors by returning principal over time.

Quick Answers to Curious Questions

An amortized bond is a bond where the principal is gradually paid off along with interest over the life of the bond, rather than being repaid in full at maturity.

In a traditional bond, the entire principal is repaid at maturity, while in an amortized bond, the principal is repaid gradually over time with each payment.

Investors might prefer amortized bonds because they receive their principal back over time, reducing the amount of capital at risk as the bond approaches maturity.