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Definition of Amortization

Amortization is an accounting method that reduces the value of a premium paid for a debt instrument over the time reaming until maturity . Amortization is also the way that loan principal is systematically paid off over the life of a loan such as with a mortgage loan on a home.

Applying "Amortization" to Securities Exams:

When an investor buys a municipal bond at a premium, for tax purposes he/ she must amortize the premium over the years remaining until the bond matures; so that when the bond reaches maturity it is worth par value. For example, if the bond is purchased for $1100 with 10 years left until it matures, the $100 premium is divided by 10 years and the bond is amortized down by $10 each year.

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