amortization of premium


Charges made against the interest received on a debt in order to offset a premium paid for the debt. Thus, with each periodic payment, a debtor is not only paying back interest, but also part of his or her premium. This leads to higher periodic payments than in the case when only interest is paid out. However, a payment schedule which includes premium amortization makes debt management easier, especially if the principal is large. While paying just the interest each period will lead to a low outflow of cash each month, the debtor might not save enough to pay the principal.
Thus, amortizing the premium each period also reduces the credit risk of the debt, since the creditor gets some part of the principal each time period, as opposed to allowing a debtor to forfeit on all of it at the maturity of the loan. Amortization of premium is a common feature in cases when a person or company takes on a large amount of debt at one time, such as a mortgage.

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You should try and make sure that you know how any amortization of premium can work in your companies favor.

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We crunched some numbers regarding the amortization of premium and came away less than impressed on how it affected our bottom line.

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Greg was glad that his loan was working on the amortization of premium, which meant that he would be able to be out of debt much more quickly.

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