## Plain Vanilla or Bullet Bonds

The most common payment structure is a plain vanilla bond with periodic, fixed coupon payments and a lump-sum payment of principal at maturity. Plain vanilla bonds are very common for government and for corporate bond issuances. They are also known as a bullet bonds because payment of principal occurs at maturity.

Consider a $1,000 face value 5-year bond with an annual coupon rate of 10%. With a bullet structure, investors would anticipate the following payment structure: $$\begin{array}{l|c|c|c|c|c} \textbf{Year} & 1 & 2 & 3 & 4 & 5 \\ \hline \textbf{Payment} & \100 & \100 & \100 & \100 & \1,100 \\ \end{array}$$ Fully Amortized and Partially Amortized Bonds On the other hand, an amortizing bond has a fixed periodic payment that reduces the outstanding principal amount to zero till the maturity. Each payment goes toward payment of both interest and principal. Likewise, a partially amortized bond includes fixed periodic payments until maturity, but only a portion of the principal is repaid. Thus, a balloon payment is required at maturity to clear out the outstanding principal. For instance, let’s work with our earlier example where an investor pays$1,000 to purchase a five-year bond that pays an annual coupon rate of 10%:

1. For the fully amortized bond, the annual payments are constant like an annuity and include both the coupon and the principal. Over time, the interest payment decreases and the principal repayment increases.

##### Capacity, Collateral, Covenants, and Character

Traditionally, many analysts evaluated creditworthiness based on what is called the “Four Cs...