Add-On Interest
Add-on interest is a new math way of accounting for, or paying off, bond debt.
Add-on interest adds on the cost of interest each period to the principal of a loan so that, at the end of the period, a huge debt is owed, payable at the time the principal is owed.
You borrow a hundred grand at 6% for five years with add-on interest. Every six months, another three grand is tacked onto that hundred grand that you owe. Or rather, the new debt that you owe after six months is $103,000, on which you then pay a half year's interest of that 6%, or 3%, on $103,000. And the compounding continues to get uglier.
Think of it as the debtor's version of acute zero coupon bond.
Related or Semi-related Video
Finance: What is Bond Amortization?7 Views
Finance a la shmoop what is bond amortization? okay fancy term easy
concept the basic idea is that you have to "revalue" what a bond is
actually worth each period which usually means twice a year because bonds pay [Monthly calendar appears]
interest on the you know semester system yeah twice a year so let's say you've
paid seven hundred bucks for a bond with a 5% coupon which comes due for a
thousand bucks in ten years over that time you'll have received two things the
5% per year interest from the bond in cash paid along the way and the [5% interest per year appears]
appreciation of the 700 bucks to become the thousand dollar par value at which
point it will eventually pay back its principal so to amortize the $300 of
appreciation of that bond over ten years while you could attribute 30 bucks a
year in appreciation each year such that after we'll say three and a half years
you'd hold the bond as having appreciated 3.5 times 30 bucks or $105 [Straight line appreciation formula appears]
in appreciation making the bond worth at that point in time eight hundred five
dollars oh yeah fancy but also pretty easy
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