A common arrangement in real estate lending might call for a five-year loan with, say, a 15-year amortisation. What this means is that the borrower makes a payment every month of a fixed amount based on a 15-year amortisation.

However, after 60 months, the borrower makes a single, much larger payment called a ‘balloon’ or ‘bullet’ to pay off the loan. Because the monthly payments do not fully pay off the loan, the loan is said to be partially amortised.

Suppose we have a $100 000 commercial mortgage with a 12 per cent APR and a 20-year (240-month) amortisation. Further suppose the mortgage has a five-year balloon. What will be the monthly payment? How big will the balloon payment be?