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Definition: Bullet

Bullet is the one time final large repayment (called as balloon payment) of a loan after none or some (say 5 or 7) small installment payments to the issuer. Thus the bullet involves payment of both the principal and the interest on the part of the borrower to the issuer. These loans are usually taken by owners of real estate expecting the interest rates to be lower at maturity such that the loan can be refinanced. Thus, this phenomenon also gives rise to some kind of speculation in these loans.

The interest rates are usually high due to the presence of high default risk as not all borrowers have so much cash to repay the entire principal plus interest after only a short time of borrowing.

Example- the 2000 real estate bubble in India involved many balloon loans.

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