What is Bullet Repayment?

Definition

Lump sum principal repayment refers to a repayment method where the borrower repays the entire principal amount at the end of the loan term. During the loan period, the borrower only needs to pay interest, and the principal is repaid in full at maturity. This repayment method is typically used for short-term loans or structured financial products, such as bonds or certain types of mortgages.

Origin

The concept of lump sum principal repayment originated from the financial market's need for flexible repayment methods, especially in short-term financing and bond markets. As financial products diversified, this repayment method became widely applied in various financial instruments.

Categories and Features

Lump sum principal repayment is mainly applied to short-term loans and certain structured financial products. Its feature is that the borrower only pays interest during the loan period, reducing cash flow pressure, but needs to repay the entire principal at maturity. This method is suitable for borrowers with stable income during the loan period but who can gather sufficient funds at maturity.

Case Studies

Case 1: A company issued a three-year bond using a lump sum principal repayment method. During the bond's term, the company pays interest annually and repays the principal in full at maturity. This method helps the company maintain lower cash flow pressure during the bond's term. Case 2: A real estate developer obtained a short-term loan for project development. The developer repays the loan principal in full using sales revenue after the project is completed and sold.

Common Issues

Common issues include the risk of the borrower being unable to gather sufficient funds to repay the principal at maturity and the misconception of neglecting principal repayment planning during the loan period. Borrowers should plan their funding sources in advance to avoid financial pressure at maturity.