What Is an Amortized Bond?

An amortized bond is one in which the principal (face value) on the debt is paid down regularly, along with its interest expense over the life of the bond. A fixed-rate residential mortgage is one common example because the monthly payment remains constant over its life of, say, 30 years. However, each payment represents a slightly different percentage mix of interest versus principal. An amortized bond is different from a balloon or bullet loan, where there is a large portion of the principal that must be repaid only at its maturity.

Understanding Amortized Bonds

The principal paid off over the life of an amortized loan or bond is divvied up according to an amortization schedule, typically through calculating equal payments all along the way. This means that in the early years of a loan, the interest portion of the debt service will be larger than the principal portion. As the loan matures, however, the portion of each payment that goes towards interest will become lesser and the payment to principal will be larger. The calculations for an amortizing loan are similar to that of an annuity using the time value of money, and can be carried out quickly using an amortization calculator.

Amortization of debt affects two fundamental risks of bond investing. First, it greatly reduces the credit risk of the loan or bond because the principal of the loan is repaid over time, rather than all at once upon maturity, when the risk of default is the greatest. Second, amortization reduces the duration of the bond, lowering the debt’s sensitivity to interest rate risk, as compared with other non-amortized debt with the same maturity and coupon rate. This is because as time passes, there are smaller interest payments, so the weighted-average maturity (WAM) of the cash flows associated with the bond is lower.

Example of Amortizing a Bond

30-year fixed-rate mortgages are amortized so that each monthly payment goes towards interest and principal. Say you purchase a home with a $400,000 30-year fixed-rate mortgage with a 5% interest rate. The monthly payment is $2,147.29, or $25,767.48 per year.

At the end of year one, you have made 12 payments, most of the payments have been towards interest, and only $3,406 of the principal is paid off, leaving a loan balance of $396,593. The next year, the monthly payment amount remains the same, but the principal paid grows to $6,075. Now fast forward to year 29 when $24,566 (almost all of the $25,767.48 annual payments) will go towards principal. Free mortgage calculators or amortization calculators are easily found online to help with these calculations quickly.

Straight-Line vs. Effective-Interest Method of Amortization

Treating a bond as an amortized asset is an accounting method used by companies that issue bonds. It allows issuers to treat the bond discount as an asset over the life of the bond until its maturity date. A bond is sold at a discount when a company sells it for less than its face value and sold at a premium when the price received is greater than face value.

If a bond is issued at a discount—that is, offered for sale below its par or face value—the discount must be treated either as an expense or it can be amortized as an asset. In this way, an amortized bond is used specifically for tax purposes because the amortized bond discount is treated as part of a company’s interest expense on its income statement. The interest expense, a non-operating cost, reduces a company’s earnings before tax (EBT) and, therefore, the amount of its tax burden.

Effective-interest and straight-line amortization are the two options for amortizing bond premiums or discounts. The easiest way to account for an amortized bond is to use the straight-line method of amortization. Under this method of accounting, the bond discount that is amortized each year is equal over the life of the bond.

Companies may also issue amortized bonds and use the effective-interest method. Rather than assigning an equal amount of amortization for each period, effective-interest computes different amounts to be applied to interest expense during each period. Under this second type of accounting, the bond discount amortized is based on the difference between the bond’s interest income and its interest payable. Effective-interest method requires a financial calculator or spreadsheet software to derive.

What Are Articles of Association?

Articles of association form a document that specifies the regulations for a company’s operations and defines the company’s purpose. The document lays out how tasks are to be accomplished within the organization, including the process for appointing directors and the handling of financial records.

Understanding Articles of Association

Articles of association often identify the manner in which a company will issue shares, pay dividends, audit financial records, and provide voting rights. This set of rules can be considered a user’s manual for the company because it outlines the methodology for accomplishing the day-to-day tasks that must be completed.

While the content of the articles of association and the exact terms used vary from jurisdiction to jurisdiction, the document is quite similar throughout the world and generally contains provisions on the company name, the company’s purpose, the share capital, the company’s organization, and provisions regarding shareholder meetings.

In the the U.S. and Canada, articles of association are often referred to as “articles” for short.

Company Name

As a legal entity, the company must have a name that can be found in the articles of association. All jurisdictions will have rules concerning company names. Usually, a suffix such as “Inc.” or “Ltd.” must be used to show that the entity is a company. Also, some words that could confuse the public, such as “government” or “church,” cannot be used or must be used only for specific types of entities. Words that are offensive or heinous are also usually prohibited.

Purpose of the Company

The reason for the creation of the company must also be stated in the articles of association. Some jurisdictions accept very broad purposes—”management”—while others require greater detail—”the operation of a wholesale bakery,” for example.

Share Capital

The number and type of shares that comprise a company’s capital are listed in the articles of association. There will always be at least one form of common share that makes up a company’s capital. In addition, there may be several types of preferred shares. The company may or may not issue the shares, but if they are found in the articles of association, they can be issued if and when the need presents itself.

Organization of the Company

The legal organization of the company, including its address, the number of directors and officers, and the identity of the founders and original shareholders, are found in this section. Depending on the jurisdiction and type of business, the auditors and legal advisors of the company may also be in this section.

Shareholder Meetings

The provisions for the first general meeting of shareholders and the rules that will govern subsequent annual shareholder meetings—such as notices, resolutions, and votes—are laid out in detail in this section.

Small Business Example of Articles of Association

A person, or group of people, starting a business will typically refer to a lawyer, accountant, or both for advice when setting up a company.

The company will choose a name and define its purpose. The company is then registered at the state/province or federal level. Note that trademarking a name is a different process.

A company may issue shares to divide up the company if it wishes, but it doesn’t need to. The articles will lay out how this can be done. The lawyer or accountant will typically work with the directors of the company, asking them questions to help figure out how they wish to grow and how the company may end up being structured in the future.

Company directors are listed, along with their personal information. A business address is also provided.

Changes can be made to the articles of association with director(s) approval.

What is Autarky?

Autarky refers to a nation that operates in a state of self-reliance. Nations that follow a policy of autarky are characterized by self-sufficiency and limited trade with global partners. The definition of autarky comes from the Greek—autos, meaning “self” and arkein, meaning “to ward off” and “to be strong enough, to suffice.” A fully autarkic nation would be a closed economy and lacking any sources of external support, trade or aid. In practice, however, no modern nation has achieved this level of autarky, even when subjected to punishing sanctions. This is because the global supply chain has made true economic isolation difficult, so any policy of autarky is a matter of degrees rather than a complete isolation.

Understanding Autarky

Autarky can be thought of as an extreme form of economic nationalism and protectionism. The motivation behind a policy of autarky is usually a combination of securing the supply of important goods and a desire to reduce the dependence on other nations in general. Depending on the type of political structure in a nation, the goal of reducing dependence on outside nations may be related to reducing the influence of competing political and economic systems. At various points in history, however, autarky has been proposed by groups all across the political spectrum. When framed in terms of keeping domestic spending at home or stopping the transfer of wealth to bad political actors, autarky touches populist themes and appears to make practical sense.

In practice, however, autarky has economic downsides that are not immediately apparent in the populist arguments. Autarky was first questioned by economist Adam Smith, and then David Ricardo. Smith suggested that countries should engage in free trade and specialize in goods they have an absolute advantage in producing, in order to generate more wealth. This is one of the core arguments Smith made in favor of free trade in The Wealth of Nations. Ricardo amended this argument slightly, saying that countries should also produce goods in which they have a comparative advantage. By leveraging comparative advantages, countries are able to work together to create more wealth in the global system of trade.

Put another way, opting out of global trade in favor of doing it all domestically has a high opportunity cost for nations, just as it does for individuals. For example, a family preoccupied with sewing their own clothes, building their own furniture, and growing their own food will necessarily have less time to work outside the home for wages. This will likely result in less income for the household and less workers for nearby employers – and, ultimately, a smaller economy due to the high degree of self-sufficiency being practiced. This is true on a global scale as well.

Real World Examples of Autarky

Historically, autarkic policies have been deployed to different extents. Western European countries deployed them under mercantilist policies from the 16th to the 18th century. This spurred economists like Smith, Ricardo, and Frederic Bastiat to refine free-market and free-trade philosophies as counter arguments.

Nazi Germany also implemented a form or autarky to ensure the strategic supply needed for its war efforts. Today, North Korea stands as the main example of a policy of autarky. North Korea’s economic isolation is a mixture of intentional self-reliance to reduce international political influence and imposed self-reliance due to being cut out of international trade through sanctions.

Autarky and the Autarkic Price

A related term, autarky price or autarkic price, refers to the cost of a good in an autarkic state. The cost of producing in a closed economy must be covered by the price charged for the good. If the cost is higher relative to other nations, then the autarky price is a dead loss for that national economy. The autarkic price is sometimes used as an economic variable when roughly calculating where a nation’s comparative advantages are. In practice, however, comparative advantages are discovered through market mechanisms rather than an economic model.

What Is an Aptitude Test?

An aptitude test is an exam used to determine an individual’s skill or propensity to succeed in a given activity. Aptitude tests assume that individuals have inherent strengths and weaknesses and have a natural inclination toward success or failure in specific areas based on their innate characteristics.

Aptitude tests are generally used for job placement, college program entry, and to help people to get an idea of where their interests and aptitudes can take them regarding careers.

Understanding Aptitude Tests

Aptitude tests can be used to determine your capabilities in a variety of subjects. For example, individuals may take an aptitude test to determine the careers that are a good match for their skills and interests. Similarly, high school students may take an aptitude test when thinking about what would be an appropriate college major or whether college is the best choice for them.

In general, aptitude tests measure one’s competence in logical reasoning, numerical skills, or verbal ability; competency can be evaluated through problem-solving tasks and testing one’s critical thinking across various contexts.

When You Might Take an Aptitude Test

Some schools administer aptitude tests to students beginning in elementary school. Combined with intelligence and achievement tests that measure student mastery of academic content, aptitude tests may be used to determine placement in gifted and talented programs or other specific educational tracks.

Language Aptitudes

For example, the Modern Language Aptitude Test (MLAT) measures a student’s potential for successfully mastering foreign languages. Aptitude tests can also help determine if a student needs special education services.

Older Students

For older students, Differential Aptitude Tests (DATs) assess a range of aptitudes from spatial relations to language usage. The results can help administrators make curricular recommendations.

Curriculum Guidance

Counselors might use high scores in mechanical reasoning tests to guide students toward courses that prepare them for engineering or designing studies in college. For instance, students who score well in tests measuring speed, accuracy, and problem-solving might choose coursework in computer science, finance, or other fields requiring attention to detail.

Hiring Decisions

Some companies use aptitude tests to help them make hiring decisions. These tests, called career assessment tests, help human resources (HR) personnel learn more about a prospective employee’s strengths and weaknesses. Career assessment tests may also be used within a company to make promotion decisions.

Situational judgment tests are a specific kind of career aptitude test that can help predict how an employee might respond to specific situations in the workplace. They are also used to assess an employee’s communication style and ability to work within a team.

Some situational judgment tests focus specifically on customer service careers. These tests analyze personality traits predictive of successful public interaction, such as empathy, diplomacy, and patience. Situational judgment tests may also be used to predict future competency in sales-related careers.

Types of Aptitude Tests

Many types of aptitude tests are taken for educational or career discovery and ability purposes. The most common aptitude tests are:

• Mechanical reasoning: These types test your knowledge of physical concepts and are generally used to evaluate you for technical positions.
• Situational judgment: These tests gauge your reactions to situations and your decision-making.
• Diagrammatic/spatial reasoning: These tests see how well you can reach a conclusion based on processes contained in diagrams.
• Abstract reasoning: These measure problem-solving abilities and identify relationships between abstract arrays.
• Numerical reasoning: In these tests, your abilities with numbers, math, and data are tested.
• Verbal reasoning: Your language, reading comprehension, and vocabulary are tested in these types.
• Inductive reasoning: Under the pressure of time, these tests see how well you analyze patterns and data.
• Logical reasoning: Logical reasoning tests measure how well you recognize patterns and sequences and identify relationships between objects.
• Clerical aptitude: Clerical tests measure how fast and accurate you can be, seeing how well you can concentrate.

How to Pass an Aptitude Test

You might have heard that you can’t prepare for an aptitude test, but nothing could be further from the truth. Study guides and practice aptitude tests are readily available online and in community or high school libraries.

Conduct an online search for the type of test you’ll be taking. You’ll find many guides that offer tips on subjects you can read about and practice tests. Once you’ve found the practice tests and some study material:

• Practice the test daily: Practicing every day gives you continuous exposure to the questions and answers and helps you identify weak spots.
• Learn the test format: Remembering the format helps you move through the test. It also allows you to identify areas you need to work on.
• Carefully read the instructions: When you take the test, don’t dive into it. Instead, read all instructions and ensure you understand them, so you don’t work through a section giving wrong answers.
• Manage your testing time: Answer the questions you know first. Then, go back and work on the more challenging questions.

The Bottom Line

An aptitude test is a measure of your ability to learn or perform required tasks and succeed in the environment you’re in. They are not a measure of intelligence—these tests look for your strengths and weaknesses, giving you and the evaluator an idea of your abilities.

Most aptitude tests can indicate success in education and a career, but they are not always 100% accurate predictions. For example, it is possible to score very low on an aptitude test for a specific job and be successful with hard work and dedication—the test may have merely taken a snapshot of your knowledge and abilities at a point where you didn’t know much about the field.

Remember that preparation can help you pass an aptitude test even if you have no prior knowledge in an area—if you think of it as learning something new and interesting, you may surprise yourself with what you can do.