Financial Terms Average Amortization Period

# Definition of Average Amortization Period

## Average Amortization Period

The average useful life of a company's collective amortizable asset base.

# Related Terms:

## PPF (periodic perpetuity factor)

a generalization formula invented by Abrams that is the present value of regular but noncontiguous cash flows that have constant growth to perpetuity.

## Amortization

The repayment of a loan by installments.

## Amortization factor

The pool factor implied by the scheduled amortization assuming no prepayemts.

## Annualized holding period return

The annual rate of return that when compounded t times, would have
given the same t-period holding return as actually occurred from period 1 to period t.

## Arithmetic average (mean) rate of return

Arithmetic mean return.

## Average

An arithmetic mean of selected stocks intended to represent the behavior of the market or some
component of it. One good example is the widely quoted Dow Jones Industrial average, which adds the
current prices of the 30 DJIA's stocks, and divides the results by a predetermined number, the divisor.

## Average accounting return

The average project earnings after taxes and depreciation divided by the average
book value of the investment during its life.

## Average age of accounts receivable

The weighted-average age of all of the firm's outstanding invoices.

## Average collection period, or days' receivables

The ratio of accounts receivables to sales, or the total
amount of credit extended per dollar of daily sales (average AR/sales * 365).

## Average cost of capital

A firm's required payout to the bondholders and to the stockholders expressed as a
percentage of capital contributed to the firm. average cost of capital is computed by dividing the total
required cost of capital by the total amount of contributed capital.

## Average life

Also referred to as the weighted-average life (WAL). The average number of years that each
dollar of unpaid principal due on the mortgage remains outstanding. average life is computed as the weighted average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal
paydowns.

## Average maturity

The average time to maturity of securities held by a mutual fund. Changes in interest rates
have greater impact on funds with longer average life.

## Average (across-day) measures

An estimation of price that uses the average or representative price of a

## Average rate of return (ARR)

The ratio of the average cash inflow to the amount invested.

## Average tax rate

Taxes as a fraction of income; total taxes divided by total taxable income.

## Compounding period

The length of the time period (for example, a quarter in the case of quarterly
compounding) that elapses before interest compounds.

## Credit period

The length of time for which the customer is granted credit.

## Discount period

The period during which a customer can deduct the discount from the net amount of the bill
when making payment.

## Discounted payback period rule

An investment decision rule in which the cash flows are discounted at an
interest rate and the payback rule is applied on these discounted cash flows.

## Dow Jones industrial average

This is the best known U.S.index of stocks. It contains 30 stocks that trade on
the New York Stock Exchange. The Dow, as it is called, is a barometer of how shares of the largest
U.S.companies are performing. There are thousands of investment indexes around the world for stocks,
bonds, currencies and commodities.

## Evaluation period

The time interval over which a money manager's performance is evaluated.

## Holding period

Length of time that an individual holds a security.

## Holding period return

The rate of return over a given period.

## Loan amortization schedule

The schedule for repaying the interest and principal on a loan.

## Moving average

Used in charts and technical analysis, the average of security or commodity prices
constructed in a period as short as a few days or as Long as several years and showing trends for the latest
interval. As each new variable is included in calculating the average, the last variable of the series is deleted.

## Multiperiod immunization

A portfolio strategy in which a portfolio is created that will be capable of
satisfying more than one predetermined future liability regardless if interest rates change.

## Negative amortization

A loan repayment schedule in which the outstanding principal balance of the loan
increases, rather than amortizing, because the scheduled monthly payments do not cover the full amount
required to amortize the loan. The unpaid interest is added to the outstanding principal, to be repaid later.

## Net period

The period of time between the end of the discount period and the date payment is due.

## Neutral period

In the Euromarket, a period over which Eurodollars are sold is said to be neutral if it does not
start or end on either a Friday or the day before a holiday.

## Planned amortization class CMO

1) One class of CMO that carries the most stable cash flows and the
lowest prepayement risk of any class of CMO. Because of that stable cash flow, it is considered the least risky CMO.
2) A CMO bond class that stipulates cash-flow contributions to a sinking fund. With the PAC,
principal payments are directed to the sinking fund on a priority basis in accordance with a predetermined
payment schedule, with prior claim to the cash flows before other CMO classes. Similarly, cash flows
received by the trust in excess of the sinking fund requirement are also allocated to other bond classes. The
prepayment experience of the PAC is therefore very stable over a wide range of prepayment experience.

## Simple moving average

The mean, calculated at any time over a past period of fixed length.

## Subperiod return

The return of a portfolio over a shorter period of time than the evaluation period.

## T-period holding-period return

The percentage return over the T-year period an investment lasts.

## Waiting period

Time during which the SEC studies a firm's registration statement. During this time the firm
may distribute a preliminary prospectus.

## Weighted average cost of capital

Expected return on a portfolio of all the firm's securities. Used as a hurdle
rate for capital investment.

## Weighted average coupon

The weighted average of the gross interest rate of the mortgages underlying the
pool as of the pool issue date, with the balance of each mortgage used as the weighting factor.

## Weighted average life

See:average life.

## Weighted average maturity

The WAM of a MBS is the weighted average of the remaining terms to maturity
of the mortgages underlying the collateral pool at the date of issue, using as the weighting factor the balance
of each of the mortgages as of the issue date.

## Weighted average remaining maturity

The average remaining term of the mortgages underlying a MBS.

## Weighted average portfolio yield

The weighted average of the yield of all the bonds in a portfolio.

## Workout period

Realignment period of a temporary misaligned yield relationship that sometimes occurs in
fixed income markets.

## WEIGHTED AVERAGE

An inventory valuation method that calculates a weighted average cost per unit for all the goods available for sale.
Multiplying that figure by the total units in ending inventory gives you the inventoryâ€™s value.

## Accounting period

The period of time for which financial statements are produced â€“ see also financial year.

## Amortization

See depreciation, but usually in relation to assets attached to leased property.

## Earnings before interest, taxes, depreciation and amortization (EBITDA)

The operating profit before deducting interest, tax, depreciation and amortization.

## Period costs

The costs that relate to a period of time.

## Weighted average cost of capital

See cost of capital.

## Periodic inventory system

An inventory system in which the balance in the Inventory account is adjusted for the units sold only at the end of the period.

## Weighted average

A method of accounting for inventory.

## amortization

This term has two quite different meanings. First, it may
refer to the allocation to expense each period of the total cost of an
intangible asset (such as the cost of a patent purchased from the inventor)
over its useful economic life. In this sense amortization is equivalent
to depreciation, which allocates the cost of a tangible long-term operating
asset (such as a machine) over its useful economic life. Second, amortization
may refer to the gradual paydown of the principal amount of a debt.
Principal refers to the amount borrowed that has to be paid back to the
lender as opposed to interest that has to be paid for use of the principal.
Each period, a business may pay interest and also make a payment on
the principal of the loan, which reduces the principal amount of the loan,
of course. In this situation the loan is amortized, or gradually paid down.

## weighted-average cost of capital

Weighted means that the proportions of
debt capital and equity capital of a business are used to calculate its
average cost of capital. This key benchmark rate depends on the interest
rate(s) on its debt and the ROE goal established by a business. This is a
return-on-capital rate and can be applied either on a before-tax basis or
an after-tax basis. A business should earn at least its weighted-average
rate on the capital invested in its assets. The weighted-average cost-ofcapital
rate is used as the discount rate to calculate the present value
(PV) of specific investments.

## Average Collection Period

average number of days necessary to receive cash for the sale of
a company's products. It is calculated by dividing the value of the
accounts receivable by the average daily sales for the period.

## Payback Period

The number of years necessary for the net cash flows of an
investment to equal the initial cash outlay

## Weighted Average Cost of Capital (WACC)

The weighted average of the costs of the capital components
(debt, preferred stock, and common stock)

## compounding period

the time between each interest computation

## payback period

the time it takes an investor to recoup an
original investment through cash flows from a project

## period cost

cost other than one associated with making or acquiring inventory

## periodic compensation

a pay plan based on the time spent on the task rather than the work accomplished

## weighted average cost of capital

a composite of the cost of the various sources of funds that comprise a firmâ€™s capital structure; the minimum rate of return that must be earned on new investments so as not to dilute shareholder value

## weighted average method (of process costing)

the method of cost assignment that computes an average cost per
equivalent unit of production for all units completed during
the current period; it combines beginning inventory units
and costs with current production and costs, respectively,
to compute the average

## Amortization

Reduction in value of an asset over some period for accounting
purposes. Generally used with intangible assets. Depreciation is the term used
with fixed or tangible assets.

## Moving average

parametrically determined prices over some time period.

## Moving-averages chart

A financial chart that plots leading and lagging
moving averages for prices or values of an asset.

## Odd first or last period

Fixed-income securities may be purchased on dates
that do not coincide with coupon or payment dates. The length of the first and
last periods may differ from the regular period between coupons, and thus the
bond owner is not entitled to the full value of the coupon for that period.
Instead, the coupon is pro-rated according to how long the bond is held during
that period.

## Amortization

The write-off of an asset over the period when the asset is used. This term
is most commonly applied to the gradual write-down of intangible items, such as
goodwill or organizational costs.

## Average inventory

The beginning inventory for a period, plus the amount at the end of
the period, divided by two. It is most commonly used in situations in which just
using the period-end inventory yields highly variable results, due to constant and
large changes in the inventory level.

## Moving average inventory method

An inventory costing methodology that calls for the re-calculation of the average cost of all parts in stock after every purchase.
Therefore, the moving average is the cost of all units subsequent to the latest purchase,
divided by their total cost.

## Reporting period

The time period for which transactions are compiled into a set of financial statements.

## average tax rate

Total taxes owed divided by total income.

## Dow Jones Industrial Average

Index of the investment performance of a portfolio of 30 â€śblue-chipâ€ť stocks.

## payback period

Time until cash flows recover the initial investment of the project.

## weighted-average cost of capital (WACC)

Expected rate of return on a portfolio of all the firmâ€™s securities, adjusted for tax savings due to interest payments.

## Average Propensity to Consume

Ratio of consumption to disposable income. See also marginal propensity to consume.

## Average Propensity to Save

Ratio of saving to disposable income. See also marginal propensity to save.

## Amortization

The systematic and rational allocation of capitalized costs over their useful lives.
Refer also to depreciation and depletion.

## Average-Cost Inventory Method

The inventory cost-flow assumption that assigns the average
cost of beginning inventory and inventory purchases during a period to cost of goods sold and
ending inventory.

## Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)

An earningsbased measure that, for many, serves as a surrogate for cash flow. Actually consists of working
capital provided by operations before interest and taxes.

## Extended Amortization Period

An amortization period that continues beyond a long-lived asset's economic useful life.

## Extended Amortization Periods

Amortizing capitalized expenditures over estimated useful lives that are unduly optimistic.

## Periodic inventory

A physical inventory count taken on a repetitive basis.

## Grace Period

A specific period of time after a premium payment is due during which the policy owner may make a payment, and during which, the protection of the policy continues. The grace period usually ends in 30 days.

## Amortization

The reduction of debt by regular payments of interest and principal sufficient to pay off a loan by maturity.

## Amortization Schedule

A schedule that shows precisely how a loan will be repaid. The schedule gives the required payment on each specific date and shows how much of it constitutes interest and how much constitutes repayments of principal.

## Critical Growth Periods

Times in a company's history when growth is essential and without which survival of the business might be in jeopardy.

## Full Credit Period

The period of trade credit given by a supplier to its customer.

## Grace Period

Length of time during which repayments of loan principal are excused. Usually occurs at the start of the loan period.

## Weighted Average Cost of Capital (WACC)

A weighted average of the component costs of debt, preferred shares, and common equity. Also called the composite cost of capital.

## amortization

The repayment of a loan by installments.

## Amortization (Credit Insurance)

Refers to the reduction of debt by regular payments of interest and principal in order to pay off a loan by maturity.

## Annuity Period

The time between each payment under an annuity.

## Waiting Period (Credit Insurance)

A specific time that must pass following the onset of a covered disability before any benefits will be paid under a creditor disability policy. (Also known as an elimination period).