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 bond’s 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.

Formula for semiannual payments:
PV = Σ [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 → $30 per year → $15 semiannually
– Yield to maturity: 5% annually → 2.5% per semiannual period
– Term: 5 years → 10 semiannual periods

PV of coupon payments (periods 1–9): 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 1–10 sum to approximately $912.48, which is the price of the bond given the inputs.

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 “bullet” 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.