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Autopsy of a Myth: Dissecting the Anatocism Fallacy in Amortization Systems

Author

Listed:
  • Rodrigo De-Losso
  • Jose Carlos de Souza Santos
Abstract
Compound capitalization – or anatocism – in loans is prohibited by law, although widely practiced. Court decisions often require that these products be valued in simple capitalization. This article demonstrates – in four alternative ways – that there is anatocism in a family of amortization systems, called the General Amortization System – SGA, in which interest is the product of its rate and the previous outstanding balance. This includes the Constant (or Hamburg) Amortization System – SAC, the Price (or French) and the American Systems, which imply anatocism. Furthermore, an original and economically based model is developed in order to build Simple Capitalization Amortization Systems – SACS, for infinite configurations of payments or amortizations, extendable to multiple and simultaneous focal-dates. The elegance of the model lies in the direct analogy to the case of compound capitalization, making its implementation immediate and working as its natural counterfactual.

Suggested Citation

  • Rodrigo De-Losso & Jose Carlos de Souza Santos, 2023. "Autopsy of a Myth: Dissecting the Anatocism Fallacy in Amortization Systems," Working Papers, Department of Economics 2023_09, University of São Paulo (FEA-USP), revised 25 Sep 2023.
    • Handle: RePEc:spa:wpaper:2023wpecon9
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    File URL: http://www.repec.eae.fea.usp.br/documentos/De-Losso_Santos_09WP_V3.pdf
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    More about this item

    Keywords

    Anatocism; SGA; SMC; SACS; compound capitalization; simple capitalization; compound interest; simple interest; amortization systems;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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