Bullet strategy
Encyclopedia
In finance, a bullet strategy is formed when a trader
invests in intermediate duration
bonds
, but does not invest in the Long and Short duration bonds.
The bullet strategy is based on the acquisition of a number of different types of securities 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
, while still realizing excellent returns on the investments.
Bullet strategies are relatively simple to implement and construct. The first step is to determine at what point on the yield curve
the series of investments should mature. This will help lead to the incremental acquisition of additions to the portfolio
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
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
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
, handle a balloon payment
that is due, or fund a college education.
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 stocks
and bonds can employ the bullet strategy, and create an attractive return for the investment.
Trader (finance)
A trader is someone in finance who buys and sells financial instruments such as stocks, bonds, commodities and derivatives. A broker who simply fills buy or sell orders is not a trader, as they are merely executing instructions given to them. According to the Wall Street Journal in 2004, a managing...
invests in intermediate duration
Bond duration
In finance, the duration of a financial asset that consists of fixed cash flows, for example a bond, is the weighted average of the times until those fixed cash flows are received....
bonds
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
, but does not invest in the Long and Short duration bonds.
The bullet strategy is based on the acquisition of a number of different types of securities over an extended period of time, but with all the securities maturing
Maturity (finance)
In finance, maturity or maturity date refers to the final payment date of a loan or other financial instrument, at which point the principal is due to be paid....
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
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
, while still realizing excellent returns on the investments.
Bullet strategies are relatively simple to implement and construct. The first step is to determine at what point on the yield curve
Yield curve
In finance, the yield curve is the relation between the interest rate and the time to maturity, known as the "term", of the debt for a given borrower in a given currency. For example, the U.S. dollar interest rates paid on U.S...
the series of investments should mature. This will help lead to the incremental acquisition of additions to the portfolio
Portfolio (finance)
Portfolio is a financial term denoting a collection of investments held by an investment company, hedge fund, financial institution or individual.-Definition:The term portfolio refers to any collection of financial assets such as stocks, bonds and cash...
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
Funding is the act of providing resources, usually in form of money , or other values such as effort or time , for a project, a person, a business or any other private or public institutions...
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
Windfall
Windfall is a serial drama television series about a group of people in an unnamed small city who win almost $400 000 000 in a lottery. The series premiered Thursday, June 8, 2006 on NBC, taking the time slot occupied by ER during the rest of the year.On August 31, 2006, NBC announced the show's...
in revenue
Revenue
In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....
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
Property is any physical or intangible entity that is owned by a person or jointly by a group of people or a legal entity like a corporation...
, handle a balloon payment
Balloon payment
When a debt is repaid in payments of varying amounts there are some colourful jargon terms used to describe the different loan structures. The term balloon payment arises because if you hold back most of a debt and pay it only towards the end of the agreement, both those last payments and the total...
that is due, or fund a college education.
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 stocks
Stocks
Stocks are devices used in the medieval and colonial American times as a form of physical punishment involving public humiliation. The stocks partially immobilized its victims and they were often exposed in a public place such as the site of a market to the scorn of those who passed by...
and bonds can employ the bullet strategy, and create an attractive return for the investment.