ShmoopTube

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

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

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

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

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

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

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

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

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

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

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

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

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four hundred grand well that last balloon payment will have

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

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

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

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

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

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

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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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