Bullet Bond A bullet bond is a debt security that repays the entire principal in a single lump sum at maturity rather than through periodic principal repayments. Bullet bonds are typically non-callable, meaning the issuer cannot redeem them early. How bullet bonds work
* Issuers (governments or corporations) pay interest over the bondβs life, and return the full face value only at maturity.
* Because the issuer must repay the full principal at once, bullet bonds can be riskier for issuers than amortizing bonds.
* Investors generally pay a premium for bullet bonds versus callable bonds, since bullet bonds protect investors from early calls if interest rates fall.
* Bullet bonds from highly rated issuers (e.g., stable governments) usually offer lower yields than those from lower-credit corporations.
Key takeaways
* Principal is repaid in one lump sum at maturity.
* Bullet bonds are usually non-callable.
* Issuers bear refinancing risk at maturity; investors are protected from early calls.
* Yields depend on issuer creditworthiness and market interest rates.
Bullet bonds vs. amortizing bonds
* Amortizing bonds repay both interest and portions of principal periodically, reducing outstanding principal over time.
* Bullet bonds may pay only interest (or no payments until maturity), with the full principal due at the end.
* Amortizing structures reduce issuer refinancing risk and can be more attractive for lower-credit issuers; bullet bonds concentrate repayment risk at maturity.
Pricing example Present value (PV) of a bullet bond equals the discounted sum of all coupon payments plus the discounted principal repayment. Explore More Resources
Formula for semiannual payments:
PV = Ξ£ [Pmt / (1 + r/2)^p] + [FV / (1 + r/2)^N]
Where:
- Pmt = coupon payment per period
- r = annual yield (decimal)
- p = period number
- N = total number of periods
- FV = face value (principal) Example:
- Face value: $1,000
- Coupon rate: 3% annually β $30 per year β $15 semiannually
- Yield to maturity: 5% annually β 2.5% per semiannual period
- Term: 5 years β 10 semiannual periods Explore More Resources
PV of coupon payments (periods 1β9): each $15 discounted by (1 + 0.025)^p
PV at period 10: $15 + $1,000 discounted by (1 + 0.025)^10 Using the formula, the present values for periods 1β10 sum to approximately $912.48, which is the price of the bond given the inputs. Explore More Resources
When to consider bullet bonds
* Investors seeking predictable principal repayment at a known future date.
* Situations where protection against early redemption (call risk) is important.
* Portfolio strategies that match lump-sum liabilities at a specific future date (a βbulletβ maturity profile).
Note: As with all fixed-income investments, evaluate issuer credit quality, interest-rate risk, and how the bond fits your overall cash-flow needs and risk tolerance.