What is Amortization, and Why Does It Matter?

The high-yield, short-term investment opportunities on Cadence offer different payment structures. There are bullet and monthly interest payments, which are typically the most straightforward. With these payment types, you either receive your principal and interest upon your investment’s maturity, or you can earn monthly interest and receive your principal only upon maturity.

With amortization, however, you get the best of both words. Each distribution issue from your investment is composed of principal and interest earned, essentially reducing your principal outstanding with each payment. By maturity, your principal will be paid back in its entirety.

How Amortization Works on Cadence

As an investor participating in our short-term note program, amortization will be used to describe the payment structure of some of our offerings as described above. It is worth mentioning, however, that amortization has a second definition, one that refers to the spreading out of capital expenses related to intangible assets over a specific duration — usually over the asset’s useful life — for accounting and tax purposes.

When pertaining to debt, amortization refers to any process of paying off debt through regular principal and interest payments over time. You might wonder why some deals include this payment structure and why others do not. Simply put, Cadence structures our deals to ensure the payment structure aligns with the tenor of the underlying assets and ultimately the underlying cash flows. As an investor in our notes, the interest earned on your investment will decrease, but not due to under-performance of the note; instead, the interest decreases as principal is paid back, as there is less principal invested to earn interest on.

The Other Amortization

From the perspective of a consumer making amortization payments, amortization can provide thorough insight on borrowing. When taking out a loan — either a mortgage or car loan — most consumers will base their decision on their most affordable monthly payment. However, calculating how much interest will be paid by the end of the loan’s life is a much more precise and rounded view on affordability. Sometimes a lower monthly payment will translate to more interest paid. For example, if one were to stretch out the repayment time, they would pay more in interest than if they would for a shorter repayment term.

What to Expect on Cadence

For every note offered on Cadence, a term sheet is always distributed after a deal closes. This term sheet will contain all relevant security details, as well as a detailed payment schedule. For amortizing notes, you will see the payment amount remain the same, but the principal outstanding reduce over time.

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