NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Debt Management and Loans
Which of the following best describes a 'balloon' repayment structure in a loan?
A balloon repayment structure has small periodic payments during the tenure and a large lump-sum final payment of the outstanding principal at the end, because the regular instalments do not fully amortise the loan.
- AEqual instalments throughout the tenure that fully clear the principal
- BSmall periodic payments followed by a large lump-sum payment of the remaining principal at the endCorrect
- CInterest-only payments with the principal forgiven at maturity
- DInstalments that reduce by a fixed amount every month
Explanation
In a balloon loan, regular payments are low and do not fully amortise the loan, so a large final payment clears the remaining principal. Equal fully amortising instalments describe a standard EMI loan. Principal is never forgiven.
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