What is Balloon Maturity?

Balloon maturity is usually related to fixed-term bonds. It means that when the maturity date of one or a group of bonds occurs within a calendar year, the result is an abnormally high bond principal. Why does this method affect the issuer and investment? Both are a good choice. 

The businessman’s thumbs-up balloon-like maturity date is usually related to the issuance of a single fixed maturity bond, rather than reporting the value of the bond by price. The value is quoted in the expected return on the maturity date.

To make the balloon maturity strategy work, bond issuers agree to a repayment plan that is fair to investors and issuers. The repayment rate of bond issuance is different from any type of bond transaction. The difference is that the issuer agrees to deposit the money into the sinking fund to ensure the redemption of the term bonds.

In some cases, the income contained in sinking funds can be used before the balloon maturity date, but the main purpose is to ensure that there are sufficient resources to meet the balloon maturity on the agreed maturity date. Use the balloon maturity method for bond issuers and investors.

Usually, for most of the bond’s duration, a series of payments are significantly lower than standard commercial loans. This means that the issuer has a lot of flexibility in designing methods to meet the expiry date requirements. Part of this process is collecting resources through the use of sinking funds.

Ideally, the sinking fund’s interest rate will exceed the expected return of the transaction. For investors, the balloon maturity strategy is a relatively safe investment method.

The existence of sinking funds can help ensure repayment and make The final rate of return on the maturity date has increased, which not only means the return of the principal investment but also consider additional income from the project.