Financial modelling terms explained

# Amortization

Amortization is a method of paying off a debt by a series of equal payments over time. This technique is used to allocate debt based on the time when it was incurred. Amortization is often used to determine the amount of a loan payment.

## What Is Amortization?

Amortization is the process of gradually reducing a debt or other financial obligation by making periodic payments. The payments are typically laid out in a schedule, which shows the amount of the debt that will be repaid in each period and the interest that will be charged on the remaining balance. This information can be used to calculate the total amount of interest that will be paid over the life of the debt and the total amount of debt that will be repaid.

## How Do You Perform Amortization?

There are a few ways to perform amortization in Excel. The most common way is to use the PMT function, which calculates the monthly payment for a loan. To use the PMT function, you need the loan amount, the interest rate, and the number of months. The PMT function will calculate the monthly payment, and the amortization table will show the amount of principal and interest paid each month.

Another way to perform amortization is to use the Excel SLN function. The SLN function calculates the single payment amount that will pay off a loan in a specific number of years. To use the SLN function, you need the loan amount, the interest rate, and the number of years. The SLN function will calculate the single payment amount that will pay off the loan in the specified number of years, and the amortization table will show the amount of principal and interest paid each month.

## Why Is Amortization Useful?

In financial modelling, amortization is used to calculate the amount of interest and principal that is paid over the life of a loan or other financial instrument. Amortization is also used to calculate the amount of a periodic payment that is allocated to interest and principal. This information can be used to help borrowers and lenders understand the financial implications of taking out a loan or other financial instrument. Additionally, amortization can be used to estimate the amount of a future payment that will be allocated to interest and principal.

## What Is the Difference Between an Amortization Schedule and a Schedule of Accumulated Amortization?

An amortization schedule is a table or chart that shows how much of a loan has been repaid and how much remains to be repaid. It also shows the amount of interest that has been paid on the loan and the amount of principal that has been repaid.

A schedule of accumulated amortization is a table or chart that shows the total amount of principal that has been repaid on a loan, the total amount of interest that has been paid on the loan, and the total amount of principal that remains to be repaid.

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