The bullet bond is a type of bond that is distinguished mainly by amortizing its principal on its maturity date.
Compared to other types of debt securities, the bullet bond is characterized by full repayment at the time of maturity.
In other words, bullet bonds allow bond issuers the possibility of paying their nominal value in the long term.
Thus, the issuing entities of this form of debt (both privately and publicly) create specific amortization schedules. According to them, periodic interest payments are established with a previously established final payment).
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How a bullet bond works
The periodic payments that the holder of this bond will receive from the issuer will consist exclusively of the interest generated.
Thus, these coupons (generally monthly) will entail a regular interest payment until the maturity of the security, where the principal will be paid together with the interest of the last time bracket after the most recent coupon.
This bond model is widely extended in certain financial fields, highlighting the public sector among them. Proof of this is its extension in bonds issued by the State.
Main features of a bullet bond
Compared to other existing types of bond in the financial context, bullet bonds stand out for the fulfillment of a series of characteristics:
- future risk. From the point of view of the issuer, it is necessary to take into account the risk incurred by having to pay the principal at maturity. In other words, they require foresight in the face of any change in the economic situation.
- Long term perspective. For the owner or holder of this debt title, it represents an investment focused on the long term. Thus, its performance is located in the future while the periodic interest coupons are received.
- official instrument. Its use by the Administration often responds to the need for public funding. Thus, bullets are a basic economic instrument.
- Leverage. The practice of successively issuing bonds of this category (this action is known as refinancing) leads organizations to encounter situations of leverage.
Following the last point, many companies use this type of bonus when their business idea is in the long term.
Having said that, it is common in the financial context to find bullet bonds issued by newly created companies, which need financing to start their activity.
Alternatively, the profile of the investor who undertakes the acquisition of bonds of this type is usually identified with a medium and high risk aversion.
These are typically investors looking to round out their portfolios with a view to long-term earnings and low volatility.