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Interactive visualization comparing fully amortizing and partially amortizing (balloon) bond payment structures. See how interest and principal components change over time, understand balloon payment risk, and compare total cash flows between structures. Essential CFA fixed-income concept.
Bond Structure
Bonds can be structured with different principal repayment schedules. This visualization compares two fundamental structures: fully amortizing and partially amortizing (balloon) bonds.
A fully amortizing bond repays all principal through regular periodic payments. Each payment is a constant amount that includes both interest and principal components:
Early payments are mostly interest (the outstanding balance is large)
Later payments are mostly principal (the balance has shrunk, so interest is smaller)
By the final payment, the balance reaches exactly zero
The periodic payment is calculated using the annuity formula: PMT = FV x r / (1 - (1+r)^(-n))
A partially amortizing bond does not fully repay principal through regular payments. A large lump sum (the balloon payment) is due at maturity:
Periodic payments are lower than the fully amortizing case
The payment amortizes only a portion of the face value (FV minus balloon)
At maturity, the remaining balance equals the balloon amount
The borrower must either refinance or have cash available for the balloon
For any bond with face value FV, balloon amount B, periodic rate r, and n periods:
When B = 0 (fully amortizing): standard annuity formula
When B = FV (interest only): PMT = FV x r
Each periodic payment splits into two components:
As the balance declines, the interest portion shrinks and the principal portion grows. This pattern is visible in the stacked bar chart as the amber (interest) portion decreases while the blue (principal) increases.
The sliders, formulas and analytics view need more room than a phone screen can give them. Open this chart on a desktop or larger tablet to use the full interactive experience.
Avoid these frequent errors
Confusing lower payments with lower cost: Balloon bonds have lower periodic payments but often result in higher total interest paid over the bond's life because the balance stays elevated longer
Forgetting the balloon is in addition to the last regular payment: The final period of a balloon bond has BOTH the regular periodic payment AND the balloon. Students often forget to include one or the other
Applying the wrong periodic rate: When payment frequency is semiannual, the periodic rate is the annual rate divided by 2, and the number of periods is years times 2. Do not use the annual rate with semiannual periods
Ignoring refinancing risk in analysis: A balloon bond at 0% coupon is not risk-free. The balloon payment creates significant refinancing risk regardless of the interest rate
Assuming bullet bonds are a different concept: A bullet bond (standard corporate bond) is simply the extreme case of a balloon structure where balloon = 100% of face value. The regular payments are interest-only
Confusing amortization with depreciation: Amortization in bond context refers to principal repayment schedule. It is unrelated to accounting depreciation of assets
Double-counting the balloon in total cost: The balloon is return of principal, not an additional cost. Total interest = sum of all payments minus face value
Strategic insights for success
Know both structures: CFA Level I tests the difference between fully amortizing and partially amortizing bonds. Be ready to calculate payments for either structure
Payment formula: Memorize PMT = FV x r / (1 - (1+r)^(-n)) for fully amortizing. For balloon, adjust the numerator to account for the present value of the balloon
Direction of effects: Higher coupon = higher payment but same principal repaid. Longer maturity = lower payment but more total interest. Higher balloon = lower payment but more refinancing risk
Credit risk comparison: Always state that fully amortizing bonds reduce credit risk over time while balloon bonds concentrate risk at maturity. This is a frequently tested conceptual question
Total interest comparison: Be prepared to calculate total interest for each structure. The balloon bond always pays more total interest (assuming same rate and maturity)
Real-world applications: Know that CMBS typically uses balloon structures, residential mortgages are fully amortizing, and corporate bonds are usually bullet (100% balloon)
Prepayment risk: Fully amortizing bonds face prepayment risk (borrowers may refinance if rates fall). Balloon bonds face refinancing risk (borrowers must refinance if rates rise). These are opposite risks