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Amortization dismantling to remove any doubt of anatocism

Author

Listed:
  • Viviana Fanelli

    (Universitá di Bari)

  • Silvana Musti

    (Universitá di Foggia)

Abstract

We propose in this paper a method for verifying the non-existence of anatocism in a periodic amortization with n periodic installments, by the replication of its cash flows. The cash flows are obtained by recursively constructing an appropriate sequence of n consecutive single period loans, at the periodic interest rate i, each one with repayment of principal and interest at the end of the single period. Since each elementary transaction is concluded within one time unit, there is no possibility of interest accruing on interest and hence anatocism is ruled out. Therefore, this characteristic must be acknowledged to be valid also for the loan amortization schedule with n periodic installments whose cash flows are perfectly replicated by the unique loan sequence obtained.

Suggested Citation

  • Viviana Fanelli & Silvana Musti, 2024. "Amortization dismantling to remove any doubt of anatocism," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 47(2), pages 485-495, December.
    • Handle: RePEc:spr:decfin:v:47:y:2024:i:2:d:10.1007_s10203-024-00470-0
    DOI: 10.1007/s10203-024-00470-0
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    More about this item

    Keywords

    Loan; Zero coupon bond; Interest; Compound interest; Anatocism; Constant annuity amortization; Constant principal amortization;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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