Add-On Interest

Add-on interest is a new math way of accounting for, or paying off, bond debt.

Add-on interest adds on the cost of interest each period to the principal of a loan so that, at the end of the period, a huge debt is owed, payable at the time the principal is owed.

You borrow a hundred grand at 6% for five years with add-on interest. Every six months, another three grand is tacked onto that hundred grand that you owe. Or rather, the new debt that you owe after six months is $103,000, on which you then pay a half year's interest of that 6%, or 3%, on $103,000. And the compounding continues to get uglier.

Think of it as the debtor's version of acute zero coupon bond.