What Is a Bullet Bond?

A bullet bond is a debt investment whose entire principal value is paid in one lump sum on its maturity date, rather than amortized over its lifetime. Bullet bonds cannot be redeemed early by their issuer, which means they are non-callable.

Bullet bonds⛄ issued by stable governments typically pay a relatively ꩲlow rate of interest due to the negligible risk that the lender will default on that lump sum payment. A corporate bullet bond may have to pay a higher interest rate if the corporation has a less-than-stellar credit rating.

In any case, bullet bonds generally pay less than comparable callable bonds because the bullet bon𒅌d does not give the lender the option of buying it back if interest rates change.

Understanding Bullet Bonds

Both corporations and governments issue bullet bonds in a variety of maturities, from short- to long-term. A portfolio made up of bullet bond🎃s is generally referred to as a bullet portfolio.

A bullet bond is generally considered riskier to its issuer than an amortizing bond because it obliges the issuer to repay the entire amount on a s꧅ingle date rat✨her than in a series of smaller repayments over time.

As a result, issuers who are relatively new to the market or who have less than excellent cr🐬edit ratings may attract more investors with a𒀰n amortizing bond than with a bullet bond.

Typically, bullet bonds are more expensive for the investor to purchase compared to an equivalent 澳洲幸运5官方开奖结果体彩网:callable bond since the investor is protected agaไinst a bond call if interest rates fall.

Bullet Bonds vs. Amortizing Bonds

Bullet bonds differ from amortizing bonds in their method of payment.

Amortized bonꦰds are repaid in regular, scheduled payments that include both interest and part of the principal. In this way, the loan iꦛs entirely repaid at its maturity date.

In contras𒉰t, bullet bonds may require small, interest-only payments, or no payments at all, until the maturity date. On that date, the entire loan plus any remaining accrued interest must be repaid.

Example of a Bullet Bond

Pricing a bullet bond is straightforward. First, the total payments for each period mu🌠st be calculated and then discounted to a present value using the following formula:

Present Value (PV) = Pmt / (1 + (r / 2)) ^ (p)

Where:

• Pmt = total payment for the period
• r = bond yield
• p = payment period

For example, imagine a bond with a par value of $1,000. Its yield is 5%, its coupon rate is 3%, 🍰and theℱ bond pays the coupon twice per year over a period of five years.

Given this inform🎃ation, there are nine periods for which a $15 coupon payment is made, and one period (the last one) for which a $15 coupon payment is made and the $1,000 principal is repaid.

Using the formula, the payments w𒊎ill be as follows:

1. Period 1: PV = $15 / (1 + (5% / 2)) ^ (1) = $14.63
2. Period 2: PV = $15 / (1 + (5% / 2)) ^ (2) = $14.28
3. Period 3: PV = $15 / (1 + (5% / 2)) ^ (3) = $13.93
4. Period 4: PV = $15 / (1 + (5% / 2)) ^ (4) = $13.59
5. Period 5: PV = $15 / (1 + (5% / 2)) ^ (5) = $13.26
6. Period 6: PV = $15 / (1 + (5% / 2)) ^ (6) = $12.93
7. Period 7: PV = $15 / (1 + (5% / 2)) ^ (7) = $12.62
8. Period 8: PV = $15 / (1 + (5% / 2)) ^ (8) = $12.31
9. Period 9: PV = $15 / (1 + (5% / 2)) ^ (9) = $12.01
10. Period 10: PV = $1,015 / (1 + (5% / 2)) ^ (10) = $792.92

These 10 present values equal $912.48, which is the price of the bo🐻nd.