A perpetual bond, also known colloquially as a perpetual or perp, is a
bond
Bond or bonds may refer to:
Common meanings
* Bond (finance), a type of debt security
* Bail bond, a commercial third-party guarantor of surety bonds in the United States
* Chemical bond, the attraction of atoms, ions or molecules to form chemical ...
with no
maturity date, therefore allowing it to be treated as
equity
Equity may refer to:
Finance, accounting and ownership
*Equity (finance), ownership of assets that have liabilities attached to them
** Stock, equity based on original contributions of cash or other value to a business
** Home equity, the diff ...
, not as
debt
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
. Issuers pay
coupons on perpetual bonds forever, and they do not have to redeem the
principal. Perpetual bond
cash flows
A cash flow is a real or virtual movement of money:
*a cash flow in its narrow sense is a payment (in a currency), especially from one central bank account to another; the term 'cash flow' is mostly used to describe payments that are expected ...
are, therefore, those of a
perpetuity
A perpetuity is an annuity that has no end, or a stream of cash payments that continues forever. There are few actual perpetuities in existence. For example, the United Kingdom (UK) government issued them in the past; these were known as cons ...
.
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.
* Perpetual bonds are still
fixed-income
Fixed income refers to any type of investment under which the borrower or issuer is obliged to make payments of a fixed amount on a fixed schedule. For example, the borrower may have to pay interest at a fixed rate once a year and repay the pr ...
securities; therefore, paying coupons is mandatory whereas paying dividends on equity is discretionary.
Examples
*
Consols that were issued by the United States and the UK governments.
* The oldest examples of a perpetual bond was issued on 15 May 1624 by the
Dutch water board of Lekdijk Bovendams. It is currently in the possession of
Yale University
Yale University is a private research university in New Haven, Connecticut. Established in 1701 as the Collegiate School, it is the third-oldest institution of higher education in the United States and among the most prestigious in the w ...
and interest was most recently paid by the eventual successor of Lekdijk Bovendams (
Hoogheemraadschap De Stichtse Rijnlanden) in 2015. Originally issued with a principal of "1000 silver of 20
Stuiver
The stuiver was a coin used in the Netherlands, worth Dutch Guilders ( 16 ''penning'' or 8 '' duit'', later 5 cents). It was also minted on the Lower Rhine region and the Dutch colonies. The word can still refer to the 5 euro cent coin, which ...
s a piece", as of 2004 the yearly interest payment to the bondholder is set at €11.35. According to its original terms, the bond would pay 5% interest in perpetuity, although the interest rate was reduced to 3.5% and then 2.5% during the 18th century.
* Most perpetual bonds issued in the present day are deeply subordinated bonds issued by banks. The bonds are counted as
Tier 1 capital and help the banks fulfill their
capital requirements
A capital requirement (also known as regulatory capital, capital adequacy or capital base) is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital ...
. Most of these bonds are
callable
A callable bond (also called redeemable bond) is a type of bond (debt security) that allows the issuer of the bond to retain the privilege of redeeming the bond at some point before the bond reaches its date of maturity. In other words, on the cal ...
, 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.
References
External links
"Perpetual debt in favour, but yields may fall" LiveMint.com, July 7, 2007
Bonds (finance)
{{Finance-stub