Perpetual bond

Perpetual bond, which is also known as a perpetual or just a perp, is a bond with no maturity date.[1] Therefore, it may be treated as equity, not as debt. Issuers pay coupons on perpetual bonds forever, and they do not have to redeem the principal. Perpetual bond cash flows are, therefore, those of a perpetuity.

Perpetual bonds vs. equity
  • Although similar to equity, perpetual bonds do not have attached votes and, therefore, provide no means of control over the issuer.
  • Also, perpetual bonds are still fixed-income securities; therefore, paying coupons is mandatory whereas paying dividends on equity is discretionary.

Examples
  • Examples of perpetual bonds are consols that were issued by the United States and the UK governments.
  • One of the oldest examples of a perpetual bond was issued in 1648 by the Dutch water board of Lekdijk Bovendams. It is currently in the possession of Yale University and interest was most recently paid by the eventual successor of Lekdijk Bovendams (Hoogheemraadschap De Stichtse Rijnlanden) in 2015.[2][3]
  • Most perpetual bonds issued nowadays are deeply subordinated bonds issued by banks. The bonds are counted as Tier 1 capital and help the banks fulfill their capital requirements. Most of these bonds are callable, but the first call date is never less than five years from the date of issue—a call protection period.

Pricing

Perpetual bonds are valued using the formula:

where:

  • is an annual coupon interest on a bond.
  • is an expected yield for maximum term available.[4]

References
  1. Types of Bonds: The Valuation of Long-Term Securities
  2. A living artifact from the Dutch Golden Age: Yale’s 367-year-old water bond still pays interest, Mike Cummings, 22 September 2015
  3. The Centuries-Old Debt That's Still Paying Interest, Tom Scott, 25 September 2017
  4. "BOND VALUATION". Archived from the original on 2015-04-21. Retrieved 2010-10-03.
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