Balloon Interest
Balloon interest happens with long-term securities that mature at regular intervals (also known as serial bond, with balloon), as opposed to all at once (term issue).
For instance, say you buy a bunch of bonds that mature every two years. The general rule with bonds is that, the closer you let them get to their maturity, the more interest you will draw. The bond that matures at ten years will collect more interest than the one that matured at two. The balloon refers to the final payment that is bigger than the previous payments. The arrangement makes it a bit easier to wait for that big payout with little payouts leading up to it.
Related or Semi-related Video
Finance: What is Balloon Interest, or a ...198 Views
Finance a la shmoop what is balloon interest or a balloon payment. All right
people you blow and blow and blow and blow and then one day it pops. Well [Balloon with loan written on it explodes]
that's kind of what a balloon loan looks like in most cases common loans are paid [House with a sold sign]
down as they go like a home mortgage on you know your brand-new home there
Well it starts out as 400 grand payable over 30 years and then little by little
grinding away year after year after year the loan is paid down and the final [Years going by and the principal remaining reducing]
payment is like well just a few grand and you're the proud owner of a 30-year
old shack it's become one after 30 years... Well were this a balloon payment style [Picture of a wooden old house]
of loan well you might have just paid interest on that four hundred grand for
twenty nine point nine years and then that last payment would be the four
hundred grand principle you'd borrowed. Huge or as a famous real estate man once
said huge, that could be one month's interest on the four hundred grand plus [Donald Trump appears]
four hundred grand well that last balloon payment will have
popped when you've paid off your house. Well the same structure of debt lives in [Guy pops the balloon with a pin]
the world of zero coupon bonds and t-bills as well where you as an investor
buy a notional par value of say a grand, at a discount meaning you're buying that
thousand dollars at a discount... meaning you pay six hundred forty-two
bucks for a payment of a thousand dollars in six years with no payments of
interest or pay down of principal in between. That final loan payoff is the [Hot air balloons in the background]
balloon oh happy day and it isn't even your birthday [Guy in a suit dancing with balloons and confetti falling]
Up Next
What is a zero coupon bond? Zero coupon bonds are an interesting investment because they don’t pay any interest. They are only desirable because...
With a reverse mortgage, payments go in the opposite direction of a normal mortgage, where you pledge your home as an asset, and receive $ each month.