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Finance: What is Balloon Interest, or a Balloon Payment? 197 Views


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Description:

What is Balloon Interest or a Balloon Payment? Balloon interest happens when bonds with growing interest are held for a long time. A balloon payment happens when the largest payment (substantially larger than the others) occurs at the end of the loan.

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Transcript

00:00

Finance a la shmoop what is balloon interest or a balloon payment. All right

00:08

people you blow and blow and blow and blow and then one day it pops. Well [Balloon with loan written on it explodes]

00:12

that's kind of what a balloon loan looks like in most cases common loans are paid [House with a sold sign]

00:16

down as they go like a home mortgage on you know your brand-new home there

00:21

Well it starts out as 400 grand payable over 30 years and then little by little

00:25

grinding away year after year after year the loan is paid down and the final [Years going by and the principal remaining reducing]

00:30

payment is like well just a few grand and you're the proud owner of a 30-year

00:35

old shack it's become one after 30 years... Well were this a balloon payment style [Picture of a wooden old house]

00:40

of loan well you might have just paid interest on that four hundred grand for

00:43

twenty nine point nine years and then that last payment would be the four

00:48

hundred grand principle you'd borrowed. Huge or as a famous real estate man once

00:53

said huge, that could be one month's interest on the four hundred grand plus [Donald Trump appears]

00:57

four hundred grand well that last balloon payment will have

01:01

popped when you've paid off your house. Well the same structure of debt lives in [Guy pops the balloon with a pin]

01:05

the world of zero coupon bonds and t-bills as well where you as an investor

01:09

buy a notional par value of say a grand, at a discount meaning you're buying that

01:14

thousand dollars at a discount... meaning you pay six hundred forty-two

01:18

bucks for a payment of a thousand dollars in six years with no payments of

01:23

interest or pay down of principal in between. That final loan payoff is the [Hot air balloons in the background]

01:28

balloon oh happy day and it isn't even your birthday [Guy in a suit dancing with balloons and confetti falling]

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