The phrase balloon payment or bullet payment refers to one of two ways for repaying a loan; the other type is called amortizing payment or Amortization (business).
With a balloon loan, a balloon payment is paid back when the loan comes to its contractual maturity – e.g., reaches the deadline set to repayment at the time the loan was granted – representing the full loan amount (also called principal). Periodic interest payments are generally made throughout the life of the loan.
Balloon payments or bullet payments are common for certain types of debt. Most bonds, for example, are non-amortizing instruments where the coupon payments cover interest only, and the full amount of the bond's face value is paid at final maturity.
Bullet payments introduce a certain amount of risk for the borrower and the lender. In many cases, the intention of the borrower is to refinance the amount of the balloon payment at the final maturity date. Refinancing risk exists at this point, since it is possible that at the time of payment, the borrower will not be able to refinance the loan; the borrower faces the risk of having insufficient liquid funds, and the lender faces the risk that the payment may be delayed.
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2 comments:
Hi Jaspreet,
I like reading your blog and learning more about finance. I just finished reading Happionaire's Cash The Crash, Yogesh Chabria and I think you will enjoy the way it has been written.
I wanted to know what are your views on some of the radical ideas in the book mentioned such as "Low Risk Means Higher Returns" and "High Interest Rates Are Good For Economy".
Hey Amit..Thanks for your much appreciated comment..I haven't read the book as of now..Will definitely read whenever I get time to lay my hands on it.
My views about the ideas mentioned in the book may not fall in the bracket of reasoning as reflected in the book.But definitely the general practise is to gain higher returns when one invests in securities with higher risk.But as mentioned by you "Low Risk Means Higher returns".It fits well with current economy which has been hit by recession especially considering the retail investors.Today people are looking forth to invest only in handful of selected companies inorder to minimise their risk and to gain returns which will be maximum compared to other sectors(e.g. Real estate,FMCG etc).
On a broader view yes I do agree with the fact that "High interest rates are good for economy",this is because it attracts foreign investments.But the key reason for high interest rate is higher inflation rate.Countries may drop the inflation to bring a fall in the interest rates but if they dont take this move, they can expect the infusion foreign funds to a larger extent that inturn boosts the economic growth.
If I happen to read the book soon,I'll definitely forward you my reviews on the same.
Thanks..
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