Bullet Bond

The bullet's cash flow stream is deliberately simple: a level coupon paid at each period, and at the final date that same coupon plus the entire face amount. Valuation follows directly. The price equals the present value of the coupon annuity plus the present value of par, each cash flow discounted at the appropriate rate. Using a single yield to maturity, the coupon stream is discounted as an annuity and par is discounted once over the full term. Using spot rates, each dated cash flow is discounted at its own zero rate, which is the arbitrage-free approach and the basis for bootstrapping a spot curve from a series of coupon-paying bullets.

Because the coupon is fixed, the relationship between coupon rate and required yield determines price level. When the market yield equals the coupon rate the bond trades at par; a higher required yield produces a discount, a lower one a premium, with the price converging to par as maturity approaches.

Concentrating repayment at a single date pushes the weighted average time to receipt of cash flows further out than for an amortizing loan of identical final maturity. That longer Macaulay duration translates into greater modified duration and larger price moves for a given yield shift. Convexity is likewise higher, because the distant par payment dominates the discounting.

The trade-off runs in two directions. Coupons must still be reinvested at uncertain future rates, so reinvestment risk exists, but it is smaller than for an amortizing structure that returns principal early and forces continuous reinvestment. Conversely, the investor carries full price risk until maturity and faces concentrated credit exposure: the issuer must produce or refinance the entire principal on one day. That refinancing wall is why bullet maturities are staggered across an issuer's capital structure.

Sovereign bullets anchor the yield curve. Because their cash flows carry no optionality and no amortization, their yields can be compared cleanly across maturities and used to construct par, spot and forward curves. Corporate credit is then quoted relative to them, whether as a G-spread over an interpolated government bullet yield or an I-spread over the swap curve. Any structure that departs from the bullet form, a callable, putable, sinking-fund or amortizing bond, is analyzed as a bullet plus or minus an embedded feature, and its option-adjusted spread is precisely the compensation left after that feature is stripped out.

At portfolio level, bullet strategies concentrate holdings around a target horizon to fund a known liability, and are contrasted with barbells and ladders. For the same duration, a bullet portfolio has lower convexity than a barbell, which matters when the curve moves in a non-parallel way.

Candidates should be able to price a bullet from a flat yield and from a spot curve, and reconcile the two by computing the yield that equates to the spot-based price. They should compute and interpret Macaulay, modified and money duration, apply a duration-plus-convexity estimate of a price change, and explain why the bullet's measures exceed those of an amortizer with the same stated maturity.

Comparative reasoning matters as much as arithmetic. Expect to rank bullet, callable, putable and amortizing bonds by effective duration and by exposure to falling or rising rates, to identify which structures require a binomial or option-adjusted framework rather than a simple yield calculation, and to explain why the bullet's absence of embedded options makes it the reference point for spread quotation and relative-value analysis.