Balloon interest can be defined as an additional interest or an increased rate that is offered on the long term maturity instruments such as bonds or certificates where there is a serial bond issue. As we know in a serial bond issue the bonds mature at different intervals and this kind of maturity of the bonds create a string or short term to long term investment instruments. Where the bonds that mature early are treated as short term investment instruments and the bonds that mature late are treated as long term investment instruments. Higher rate of interest is offered on the long term investment bonds so that investors must keep their investment by holding their bonds for a longer period of time.
In this way investor are attracted to keep their investment for long time and the coupon rate that is additionally offered to investors is called balloon interest. The name balloon interest is given to this interest rate is due to the fact that it is usually inflated. The major objective behind issuing serial bonds is to gather fund for a newly started revenue generated projects and to increase the cash flow in a steady manner. The reason behind associating balloon interest with the project is that the owner of the project believe that the project will be at the height of generating power revenue when the balloon interest of the investor will be due to be paid.
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