AMORTISATION in Law is an alienation in mortmain ; that is, a transfer of lands in perpetuity to a corporation or charity. The law gener ally on this subject will be found under MORTMAIN.
In Finance its general signification is the redemption, reimbursement, liquidation, or repayment of debt. In particular it refers to the drawing and repayment of Government or debenture bonds. The investor in such securities should therefore be careful to see whether those he favours are subject to amortisation, and if so, its particular nature. There are various methods of amortisation. The bonds may be redeemable at " par " at a fixed future date ; or a sinking fund may be created by the borrowers, in order to re purchase the stock whenever its price is low ;.or the redemption may be by means of drawings. In regard to the first above-mentioned method of redemption, it is important to the investor, especially if the bonds were purchased at above " par," to know at what date the redemption at " par " will take place. If this will happen within the course of a few years, the good interest he is probably receiving will be more than counterbalanced by their depreciation to "par," which will be their redeemable value. The investor can then provide for this contingency by setting aside a small percentage of the interest he receives as a sinking fund on his own account. For example, a security paying 4 per cent., redeemable at " par " in ten years' time, is purchased at 105s. Here, if I per cent. of the interest is saved annually, the depreciation would be made good by the time for redemption. In the
case of a larger investment, the sinking fund would be created, of course, on a properly-calculated basis.
The second method of amortisation, by repurchase in the market, need not occupy our attention. But it is important that the investor should pay attention to amortisation by way of redemption drawings. At the time the bonds are issued, notice is given as to the number to be drawn at different periods, and the price of the redemption. At the stated periods, the requisite number of bonds will accordingly be drawn in a lottery, and the bonds will then be known as " drawn bonds." As all of the bonds issued are numbered, a list, giving the numbers of the drawn bonds, will be advertised. This list should be seen by the investor as soon as possible, for, from the time of the drawing, all interest ceases ; and if his bonds are amongst those drawn, he should present them for payment of the principal and interest.
Bankers usually undertake the watching of the lists for their customers, and, for a small fee, make the collection. In the case of bonds redeemable by drawings, the time for amortisation being uncertain., the current market price of the securities is determined, amongst other things, by that uncertainty. Accordingly, the holder of such bonds should have no need himself to provide a sinking fund. See further hereon, under the headings: ANNUITY ; SINKING FUNDS.