Amortized bonds

Amortized bonds are bonds that include a partial phased return of the face value to the investor during the life circle of the issue.

The par value of an amortized bond is divided and paid in accordance with the amortization schedule. As a rule, depreciation is represented by straight-line method, by calculating equal payments throughout the entire circulation period. However, there is also a non-linear method , the conditions of which are usually specified in the issuing document.

Advantages for the investor:

• The credit risk of the bond is significantly reduced as principal is repaid over time rather than at maturity, when the risk of default is the greatest.
• It’s a profitable investment when interest rates are expected to rise. The released funds can be reinvested at a higher percentage and receive additional profit.

Disadvantages for the investor:

• Decreased coupon payments on partial redemption of face value, hence lower yield.
• Time and financial costs. Time costs are associated with the reinvestment of funds released during partial repayment of the debt. Financial costs arise as a result of increased trade turnover and commission costs.

Advantages for Issuer:

• Even distribution of the debt burden. The depreciation mechanism is beneficial for companies with a regular cash flow, i.e. business with a gradual return on investment. In this case, the partial repayment of the debt is painless for the enterprise, in contrast to the one-time withdrawal of liquidity from the company’s working capital at the end of the bond’s maturity.
• Less cost to the organization to service debt. By partially repaying the principal debt on bonds, the issuer reduces the amount of future coupons.

Cons for the issuer:

• They create a high current debt - this is inconvenient for organizations implementing large projects that do not imply a quick payback.