Bullet Bond

What Is a Bullet Bond?

A bullet bond is a debt investment whose whole principal value is paid in one lump sum on its maturity date, as opposed to amortized over its lifetime. Bullet bonds can't be recovered ahead of schedule by their issuer, and that means they are non-callable.

Bullet bonds issued by stable states typically pay a somewhat low rate of interest due to the unimportant risk that the lender will default on that lump sumpayment. A corporate bullet bond might need to pay a higher interest rate on the off chance that the corporation has a not exactly heavenly credit rating.

Regardless, bullet bonds generally pay not exactly comparable callable bonds in light of the fact that the bullet bond doesn't provide the lender with the option of buying it back assuming interest rates change.

Understanding Bullet Bonds

The two corporations and states issue bullet bonds in different maturities, from short-to long-term. A portfolio comprised of bullet bonds is generally alluded to as a bullet portfolio.

A bullet bond is generally viewed as riskier to its issuer than an amortizing bond since it obliges the issuer to repay the whole amount on a single date as opposed to in a series of smaller repayments over the long haul.

Thus, issuers who are moderately new to the market or who have not exactly great credit ratings might draw in additional investors with an amortizing bond than with a bullet bond.

Typically, bullet bonds are more costly for the investor to purchase compared to an equivalent callable bond since the investor is protected against a bond call in the event that interest rates fall.

A "bullet" is a one-time lump-sum repayment of an outstanding loan made by the borrower.

Bullet Bonds versus Amortizing Bonds

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

Amortized bonds are repaid in normal, scheduled payments that incorporate both interest and part of the principal. Along these lines, the loan is totally repaid at its maturity date.

Conversely, bullet bonds might require small, interest-only payments, or no payments by any means, until the maturity date. On that date, the whole loan plus any excess accrued interest must be repaid.

Illustration of a Bullet Bond

Evaluating a bullet bond is direct. To start with, the total payments for every period must be calculated and afterward discounted to a current value utilizing 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 instance, envision a bond with a par value of $1,000. Its yield is 5%, its coupon rate is 3%, and the bond pays the coupon two times a year over a period of five years.

Given this data, 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.

Utilizing the formula, the payments will 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 equivalent $912.48, which is the price of the bond.

Features

• The issuer of a bullet bond acknowledges the risk that interest rates during the life of the bond will diminish, delivering its rate of return generally exorbitant.
• The two legislatures and corporations issue bullet bonds in various maturities.
• A bullet bond is a non-callable bond wherein the principal is repaid as a lump sum when the bond develops.