In finance, a bullet strategy is followed by a trader investing in intermediate-duration bonds, but not in long- and short-duration bonds. The bullet strategy is based on the acquisition of a number of different types of

securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...

over an extended period of time, but with all the securities maturing around the same target date. One of the main benefits of the bullet strategy is that it allows the investor to minimize the impact of fluctuations in the

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, t ...

, while still realizing excellent returns on the investments.

Advantages

Bullet strategies are relatively simple to implement and construct. The first step is to determine at what point on the

yield curve In finance, the yield curve is a graph which depicts how the yields on debt instruments - such as bonds - vary as a function of their years remaining to maturity. Typically, the graph's horizontal or x-axis is a time line of months or ye ...

the series of investments should mature. This will help lead to the incremental acquisition of additions to the

portfolio Portfolio may refer to: Objects * Portfolio (briefcase), a type of briefcase Collections * Portfolio (finance), a collection of assets held by an institution or a private individual * Artist's portfolio, a sample of an artist's work or a c ...

that will reach maturity on the same target date. Staggering the acquisition dates of the assets means that the risk associated with interest rates is diluted. The investor is able to pick up good deals on various bonds and other securities along the way, arranging the maturities to coincide with the desired final date. One of the advantages of the bullet strategy is that the investments are acquired and then set aside until the maturity date arrives. Of course, this means that the

funds Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm use ...

used to acquire the securities should not be used until the date of maturity. However, for people who are thinking in terms of creating a windfall in

revenue In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business. Commercial revenue may also be referred to as sales or as turnover. Some companies receive rev ...

at a given point in time, this approach is an excellent solution. The earnings realized from the bullet strategy may be used to make final payments on

property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner of property may have the right to consume, alter, share, r ...

, handle a

balloon payment A balloon payment mortgage is a mortgage which does not fully amortize over the term of the note, thus leaving a balance due at maturity.Wiedemer, John P, ''Real Estate Finance, 8th Edition'', p 109-110 The final payment is called a ''balloon ...

that is due, or fund a

college education Undergraduate education is education conducted after secondary education and before postgraduate education. It typically includes all postsecondary programs up to the level of a bachelor's degree. For example, in the United States, an entry-l ...

. The bullet strategy can be composed of any number of different types of bonds and other securities. With no limit on the number of assets that can be employed as part of this investment scheme, it is possible for the investor to gradually accumulate all the assets needed to ensure the level of return that is desired at a certain point in time. Both small investors as well as investors who deal in major

stock In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a compan ...

s and bonds can employ the bullet strategy, and create an attractive return for the investment.

Alternatives

By comparison, in a

barbell strategy In finance, a barbell strategy is formed when a trader invests in long- and short-duration bonds, but does not invest in intermediate-duration bonds. This strategy is useful when interest rates are rising; as the short term maturities are rolled o ...

the maturity of the bonds included in the portfolio is concentrated at two extreme maturities, while in the strategy referred to as laddering or ladder strategy the portfolio is constructed to have approximately equal amounts of each maturity.

References

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Advantages

Alternatives

See also

References