You want to put some money in the bond market. Rates look pretty good now, but you're worried. You're afraid that interest rates are going to change over time and mess with your investment. If rates go up, the return you're getting won't keep up with inflation and you'll feel like a sucker.
An index-amortizing note is here to help. It's a note (a.k.a. a bond) where the repayment schedule resets according to the movement of an interest rate-tracking index (LIBOR is a popular choice, or something tied to mortgage rates).
Basically, if interest rates move enough, the structure of the bond changes so that you get paid back more quickly. You get your money back sooner, so you can invest in a different bond, one more suited to the current interest rate climate.
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Finance: What is Bond Amortization?7 Views
Finance a la shmoop what is bond amortization? okay fancy term easy
concept the basic idea is that you have to "revalue" what a bond is
actually worth each period which usually means twice a year because bonds pay [Monthly calendar appears]
interest on the you know semester system yeah twice a year so let's say you've
paid seven hundred bucks for a bond with a 5% coupon which comes due for a
thousand bucks in ten years over that time you'll have received two things the
5% per year interest from the bond in cash paid along the way and the [5% interest per year appears]
appreciation of the 700 bucks to become the thousand dollar par value at which
point it will eventually pay back its principal so to amortize the $300 of
appreciation of that bond over ten years while you could attribute 30 bucks a
year in appreciation each year such that after we'll say three and a half years
you'd hold the bond as having appreciated 3.5 times 30 bucks or $105 [Straight line appreciation formula appears]
in appreciation making the bond worth at that point in time eight hundred five
dollars oh yeah fancy but also pretty easy
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