Balloon Interest

Balloon interest happens with long-term securities that mature at regular intervals (also known as serial bond, with balloon), as opposed to all at once (term issue).

For instance, say you buy a bunch of bonds that mature every two years. The general rule with bonds is that, the closer you let them get to their maturity, the more interest you will draw. The bond that matures at ten years will collect more interest than the one that matured at two. The balloon refers to the final payment that is bigger than the previous payments. The arrangement makes it a bit easier to wait for that big payout with little payouts leading up to it.