Bullet strategy

A bullet strategy is a fixed-income investment approach of purchasing bonds that all (or predominantly) mature on the same target date — e.g., all maturing in 2035. The strategy concentrates principal repayment at a single point, aligning the investment with a known future need (retirement, college funding, liability maturity).

How bullet strategy works

Scenario: An investor knows they need $100,000 in 10 years for their child’s college tuition.

The bullet approach:

Buy $100,000 (face value) of 10-year Treasury bonds or corporate bonds all maturing in 10 years. Upon maturity, receive the full principal, which funds the college costs exactly.

Advantages:

• Certainty. Assuming the bond issuer doesn’t default, you will receive exactly the needed amount at exactly the needed time.
• Simplicity. No reinvestment decisions; the bonds mature when you need the money.
• Immunization. Interest-rate moves are irrelevant because you are holding to maturity.
• Liquidity planning. You know exactly when cash will be available.

Interest-rate dynamics

• If rates rise after purchase: The bond value falls, but you do not care because you are holding to maturity. You receive par value at the target date.
• If rates fall after purchase: The bond value rises, but you do not care because you are holding to maturity. You still receive par value, and cannot reinvest at higher rates.

The key difference from ladder strategy: the bullet investor is indifferent to post-purchase rate changes (holding to maturity); the ladder investor is affected (reinvestment at new rates).

Risks

1. Reinvestment risk. On the bullet date, you receive a large amount of principal and must reinvest it. If rates have fallen, reinvestment yields are low.
2. Opportunity cost. If rates rise significantly, a bullet position cannot reinvest at higher yields (locked in until maturity).
3. Concentration risk. All principal on one date means no flexibility if needs change.
4. Credit risk. If the issuer defaults before maturity, you lose principal. Concentration in one issuer is riskier than diversification.

When bullet works best

• Defined future liability. College tuition in 10 years, mortgage payoff in 15 years, retirement spending in 20 years.
• Conservative investors. Those who value certainty and do not want to think about reinvestment.
• High-quality issuers. Treasury or high-grade corporate bonds minimize default risk.

See also