What is Balloon Interest?
How Does Balloon Interest Work?
To understand balloon interest, one must first understand serial bonds (or installment ) describes a that matures in portions over several different dates.. The term
Normally, when a company or government body debt on one particular day). A serial , however, matures over several periods (usually at regular intervals)., all of those mature on the same date (that is, the borrower must repay all of the
For example, the principal payment at the end of the 10th (see the table below). But the issuer of $100 million in serial might structure the such that $20 million matures after five , another $20 million matures the after, $20 million the after that, and so on.of $100 million in traditional with 10-year have to make a $100 million
Balloon interest means that therates on these serial gets progressively higher with . So, the maturing in 6 might carry a lower than the ones that mature in 7, and 7's might carry a lower than the ones that mature in 8, and so on.
Why Does Balloon Interest Matter?
Balloon interest encourages savings, assuming the is able to make the promised repayments, even if the rates get progressively higher.to hold onto longer. It can also help the manage its flows. in the example that the traditional-bond must make payments on $100 million of outstanding for a full 10 years, whereas the serial-bond must only do so until five. After five, the redeems $20 million of that and thus only has to pay interest on $80 million, then $60 million, then $40 million, and so forth. This can represent a considerable