Introduction

A Bullet Bond is a type of fixed-income security where the entire principal amount is repaid at maturity, in a single lump-sum payment, rather than through periodic amortisation. Throughout the life of the bond, the issuer may pay only interest, typically on a quarterly or semi-annual basis, with the principal remaining untouched until the end.

Bullet bonds are a common structure in corporate, government, and infrastructure financing, particularly in India where institutional investors favour predictable and simple repayment schedules. Unlike callable bonds, bullet bonds cannot be redeemed early by the issuer, offering certainty of cash flow to investors.

What Is a Bullet Bond?

• A Bullet Bond, sometimes referred to as a non-amortising bond, is characterised by:
• Regular interest payments throughout the tenure.
• No principal repayment until maturity.
• No embedded call option (i.e., the issuer cannot repay the bond before the maturity date).
• This structure makes it ideal for long-term projects or investments where the borrower prefers to defer repayment of principal until the end of the loan term.
• For example, a company may issue a ₹100 crore bullet bond with a 7-year maturity and 9% annual interest rate. The investor receives ₹9 crore annually as interest and the full ₹100 crore at the end of 7 years.

Key Features of Bullet Bonds

• Fixed Maturity Date: The principal is repaid only on this date.
• Periodic Coupon Payments: Interest is paid regularly (monthly, quarterly, or annually).
• No Early Redemption Option: Unlike callable bonds, bullet bonds must be held until maturity.
• Straightforward Repayment Schedule: Investors know exactly when to expect principal repayment.

Advantages of Bullet Bonds

1. Predictability for Investors

• Investors receive fixed interest income and know exactly when the principal will be repaid.

2. Simplicity in Structuring

• Unlike amortising bonds, bullet bonds have no complex repayment schedules.

3. Ideal for Long-Term Borrowing

• Useful for infrastructure or real estate developers who expect cash flows at a later date.

4. No Call Risk

• Since the bond has no call option, investors are assured of full tenure and interest payments.

Disadvantages of Bullet Bonds

1. Higher Default Risk at Maturity

• As principal repayment is deferred, any financial strain on the issuer at maturity could lead to default.

2. Lower Liquidity in Some Cases

• Investors may face difficulty selling these bonds before maturity if secondary market demand is low.

3. No Early Exit for Issuer

• Issuers cannot prepay or refinance the bond without the option, even if interest rates decline.

Bullet Bonds in India

In India, bullet bonds are popular among:

• Public Sector Undertakings (PSUs)
• State and Central Governments
• Infrastructure and Housing Finance Companies
• Banks issuing infrastructure bonds
• The RBI and SEBI have set guidelines for such instruments, especially in the case of bonds issued by NBFCs and corporates to ensure credit discipline and investor protection.

For instance, government securities (G-Secs) and capital market debentures often follow the bullet structure, with the principal paid back on a pre-agreed maturity date.\

Who Should Invest in Bullet Bonds?

• Institutional investors, such as mutual funds, insurance companies, and pension funds, looking for predictable long-term returns.
• HNIs seeking stable income and lump-sum maturity benefits.
• Investors with a specific financial goal aligned with the bond's maturity period.

Conclusion

Bullet Bonds are a widely used and investor-friendly fixed-income instrument, offering fixed interest income and a one-time principal repayment at maturity. Their non-callable, non-amortising nature makes them ideal for investors who value stability and clarity in repayment schedules.

In India’s growing bond market, bullet bonds continue to attract long-term institutional investors and play a key role in project and infrastructure financing. While they carry some maturity-related risk, careful issuer evaluation can make them a valuable addition to a conservative investment portfolio.

Reference used: https://www.investopedia.com/terms/b/bulletbond.asp

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