What is the difference between bullet maturity and amortizing bond structures, and which has higher interest rate risk?

Bullet maturity and amortizing structures differ fundamentally in how principal is repaid, which directly affects their duration, interest rate risk, and reinvestment risk profiles.

Bullet Bond:

All principal is repaid at maturity. During the bond's life, the investor receives only coupon payments.

Cash flows for a 5-year, $1,000 par, 6% bullet bond:

• Years 1-4: $60 coupon each year
• Year 5: $60 coupon + $1,000 principal = $1,060

Amortizing Bond:

Principal is repaid gradually over the bond's life, similar to a mortgage. Each payment includes both interest and principal.

Cash flows for the same terms as a fully amortizing bond:

• Each year: ~$237.40 (decreasing interest + increasing principal)
• Year 5: Final payment of ~$237.40 (mostly principal)

Comparison:

Why Duration Differs:

Duration is the weighted-average time to receive cash flows. A bullet bond has its largest cash flow (principal) at the end, pulling duration toward maturity. An amortizing bond returns principal earlier, reducing the weighted-average time.

Example:

A 10-year bullet bond at 5% coupon has a Macaulay duration of approximately 8.1 years. A fully amortizing 10-year bond at the same rate has a duration of approximately 4.5 years — nearly half.

Practical Implication:

If interest rates rise 100 bps:

• Bullet bond price falls ~8.1%
• Amortizing bond price falls ~4.5%

Amortizing structures are therefore preferred when an investor expects rising rates or wants to limit duration exposure.

CFA Exam Tip: When a vignette describes a bond's repayment structure, immediately assess whether it's bullet, amortizing, or partially amortizing — this determines which duration and risk analysis applies.

Practice bond structure problems in our CFA fixed income question bank.