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Generally acceptable principles for financial amortization: a modest proposal

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Abstract

We propose a minimal set of commonly acceptable principles to consistently formulate amortization schedules in accordance with different contractual clauses. Our goal is bringing to the fore premises that are sometimes left implicit, and yet seem to draw a wide consensus in practice. We demonstrate by means of examples how these principles may be used to deal with risk or financial innovations, and to fill gaps arising from unforeseen contingencies.

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Notes

  1. There is no connection with the Generally Accepted Accounting Principles (GAAP), usually associated with the Accounting Standards Codification (ASC) published by the Financial Accounting Standards Board (FASB).

  2. That is, the GAP are meant to fill some gaps—pun intended.

  3. We are aware that the norms of a specific country may impose stronger restrictions, but the legalities of different countries are out of the scope of this paper. Yet, to the best of our knowledge, the GAP are compatible with the legal frameworks currently in force across the European Union.

  4. In the literature, A2 is known as the elementary equivalence whereas the financial equivalence states the equality between the initial outstanding debt and the present value of all payments. We argue that the elementary equivalence is a simpler and thus better candidate for a generally acceptable principle.

  5. Throughout the paper, we carry out exact computations but show numbers rounded to the second digit. This explains seeming incongruities such as \(D_3 - C_4 \ne D_4\) in Table 1.

  6. We assume a male borrower and a female lender.

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Authors and Affiliations

  1. Department of Decision Sciences, Università Bocconi, Via Röntgen 1, Milano, 20136, Italy

    Francesca Beccacece

  2. Department of Management, Università Ca’ Foscari Venezia, Venice, 30121, Italy

    Marco LiCalzi

Authors
  1. Francesca Beccacece
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  2. Marco LiCalzi
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Correspondence to Francesca Beccacece.

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The authors did not receive support from any organization for the submitted work. They have no financial or proprietary interest to disclose. One of the authors is a member of the Editorial Board for Decisions in Economics and Finance.

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We wish to thank Margherita Cigola, Gino Favero, and Laura Ziani for their comments.

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Beccacece, F., LiCalzi, M. Generally acceptable principles for financial amortization: a modest proposal. Decisions Econ Finan (2023). https://doi.org/10.1007/s10203-023-00420-2

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  • DOI: https://doi.org/10.1007/s10203-023-00420-2

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