BULLET BOND

Summary

A bullet bond is a straightforward type of bond where investors receive periodic interest payments (coupons) throughout the bond's life, and then get back their entire original investment (principal) in one large payment when the bond matures. Think of it like a loan where you receive interest payments along the way, but the borrower pays back the full loan amount all at once at the end, rather than making gradual principal payments over time.

Usage Context

Understanding bullet bonds is essential when analyzing bond cash flows, calculating bond values and yields, comparing different bond structures, and making investment decisions based on cash flow timing preferences and reinvestment risk considerations.

Common Confusions

• Thinking that bullet bonds don't pay any interest until maturity
• Confusing bullet bonds with zero-coupon bonds
• Believing that all bonds are bullet bonds
• Misunderstanding that the 'bullet' refers to the lump sum principal payment, not the interest payments
• Assuming bullet bonds are riskier than amortizing bonds in all situations