Interpretation and Use of the Amortization Table
When money is borrowed to make long-term capital investments, it is generally paid back in a series of annual or semiannual payments. If these payments are to be the same amount each time, the loan is amortized. The even payment plan method of amortizing a loan allows for the payment of interest on the unpaid balance, plus some principal. The amount of the interest paid each period will decrease while the amount of the annual payment applied toward the principal will increase. The example in Table 1 illustrates how the amount of interest and principal changes over the loan period.