Balloon payment on a bond

How is a bullet bond repaid?

Investors and holders of a simple “in fine” bond (a Latin phrase meaning “at the end”) benefit from an interesting feature regarding the repayment of principal. Specifically, the principal of the bond is repaid in a single lump sum on the bond’s maturity date, which means that throughout the bond’s term, the issuer pays only the interest.

It’s a bit like buying a car on credit and paying only the interest during the term of the loan, then paying off the principal in full at maturity.

Thus, in the case of a simple bond with a “bullet” repayment, the principal remains tied up for the entire term of the loan, allowing interest to be calculated on the full initial principal amount. This type of investment product is relatively attractive for those seeking to maximize their return by receiving regular interest payments on the entire amount invested without seeing their principal reduced by interim payments.

Let’s take a concrete example: if you invest €1,000 in a crowdfunding project with a bond issue at a gross annual rate of 5%, with a 2-year term and annual repayment, here is what you will receive:

• €50 in gross interest in the first year.
• €50 in gross interest + €1,000 in principal in year 2, at the end of the loan term.

The “balloon payment” repayment structure is generally the most common practice in the financial market—at least at Enerfip. It differs from an amortizing bond, which involves the repayment of principal in installments according to a repayment schedule.