Balloon Interest

DEFINITION of 'Balloon Interest'

An increased coupon rate on the longer term maturity instruments within a serial bond issue. In a serial issue, bonds mature at different intervals, creating a string of short- to long-term instruments. Higher interest is earned on the long-term bonds, providing incentive to investors for holding the instrument for an increased period.

BREAKING DOWN 'Balloon Interest'

Investors refer to this large coupon rate as balloon interest, since it is often inflated. Serial bonds are usually issued to fund revenue-generating projects with steadily increasing cash flows. The issuer hopes that the project will be near the height of its earning power, by time the balloon interest is due.