Bullet Bond Strategy
Bullet Bond Strategy is a type of investment strategy in which an investor invests in various bonds for a specific time period that has the same maturity date and will able to redeem the total lump sum amount on the date of maturity. Under this strategy, it should be noted that various bonds are purchase at different times, but the maturity will be decided as same for all the bonds.
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Mainly investors invest in various bonds under this strategy to meet their future needs for various reasons like meeting the need for education loan, purchasing a house, for marriage, etc. Bullet bonds are issued by both government and private companies. Investing in a bullet bond issued by a private company carries a risk that whether the company can pay the total amount at the time of maturity or not because the company will be liable to pay the principal amount with the total return earned on principle for a particular period on the date of maturity.
How does it work?
If an investor decides to invest in a bullet bond strategy, a bullet portfolio will be made of various bonds which gives a good return to investors and the maturity date will be made fixed for all bonds that an investor purchases at different points in time. First of all, investors will try to study the amount of yield generated on a future specific date, and based on this investor will purchase various bonds that mature on the date which gives him maximum yield.
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Advantages of Bullet Bond Strategy
- Under this strategy, there is no risk of reinvestment from the side of the investor.
- Bullet bond provides only the interest amounts annually and does not pay back the principal amount like other bonds thus the yield is much higher as compared to other bonds.
- Future needs can be planed by investing in such bonds.
- As the maturity date of a different bond is the same investor does not have to take up for his investment once do then on the date of maturity, he has looked after it.
Disadvantages of Bullet Bond Strategy
- At the time of maturity, the issuer is liable to pay the whole amount so it becomes a risk for the investor whether the issuer is will able to pay or not and especially in the case of a private company.
- It also carries high counterparty risk because the bank that has invested in such bonds has to make a huge provision for the same.
- Any investor cannot redeem their fund before the maturity date if they feel their investment is at risk.
- No secondary market is also available to sell the security if any investor needs money or feels that its investment is at risk.
Thus, a bullet bond strategy helps the investor invest their money by planning the highest yield for a particular time frame. Under this investment, the investor does not have to analyze their investment frequently because once the decision is made to invest for a particular time after than investor cannot redeem their money till the date of maturity and will get the return for a specific interval and on the date of maturity total amount with principle amount will be returned back. This type of strategy may result in a win-win situation for both the issuer may get funds at a low-interest rate rather than taking from the banks or other financial institutions and investors can gain a specific return on their investment after few years to meet their future needs.
Author: Charmi Mehta
About the Author: Charmi Mehta is currently pursuing MBA with a specialization in Finance from the Department of Business Administration, Bhavnagar. Charmi is very much interested to work with data and its analysis and she is also fascinated by the financial market.