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. 



|||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.