Amortization Schedule

From Open Risk Manual

Definition

The Amortization Schedule denotes an aspect of the specification of Contractual Cash Flows, typically of debt like instruments (such as Loans or Bonds) and in particular the manner in which the total outstanding Exposure might be evolving over time.

Specification

The specification of a simple amortization schedule requires making the following choices

  • whether the schedule concerns exclusively Principal Repayment or the combined Principal and Interest Repayment
  • the initial principal balance (e.g. borrowed amount)
  • the repayment frequency (monthly, quarterly, semi-annual or annual are choices applicable to different products)
  • the number of payments (equivalently the Maturity Date of the contract)
  • the Reference Interest Rate calculation methodology (if applicable)

Notes

  • At any intermediate time the amortization schedule determines the Outstanding Amount
  • The final outstanding amount determines whether the schedule is a full or partial amortization.

Amortization Types

The following lists the most commonly used amortization types

Linear Schedule

A linear schedule is characterised by a constant rate of principal repayment. The rate of principal repayment together with the number of payments (or the final maturity date) determine whether there is a final Balloon payment or not.

Since the linear schedule is defined in terms of principal repayments, the interest payment may be either fixed in advanced or in relation to a floating Reference Interest Rate

Interest Only Schedule

In an interest only schedule there is no principal repayment except for the final payment. Also sometimes term "Bullet" loan.

An interest only schedule is a limiting case of the linear amortization schedule, with the rate of principal repayment set to zero.

Interest only schedules can be both fixed or floating rate instruments

Fixed (Annuity) Schedule

A fixed repayment schedule is characterized by a constant total payment in each period, hence it is specified in terms of port interest and principal repayments. Furthermore, since the size of the payment (including the interest payment) must be known, a fixed or annuity type schedule must by definition be a fixed rate loan.

Negative Amortization

Increasing balances (effectively additional borrowing that is pre-arranged) may be part of the agreed documentation of a Credit Facility

Custom (Bespoke) Schedule

In individual (customized) contracts any variation of the above may be introduced, indicatively:

  • Mixed schedules (e.g. interest only for some period)
  • Contracts with embedded optionality (e.g. where the borrower can opt for a different schedule)

EBA Loan Templates

The EBA NPL Template captures loan amortization schedules in the EBA NPL Loan Table and in particular the EBA NPL.Loan.Amortisation Type field. The field type is a Choice field and the following choices are available:

  1. Linear (L)
  2. Annuity (A)
  3. Interest Only (IO) i.e. no amortisation with a bullet
  4. Bespoke Repayment

Issues and Challenges

  • An amortization schedule merely reflects contractual agreements. The actual realization of cash flows is subject to a large number of uncertainties (Risk Factor)

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