A perpetual bond, also known colloquially as a perpetual or perp, is a
bond with no
maturity date
Maturity or immaturity may refer to:
* Adulthood or age of majority
* Maturity model
** Capability Maturity Model, in software engineering, a model representing the degree of formality and optimization of processes in an organization
* Develop ...
, therefore allowing it to be treated as
equity, 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 d ...
. 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.
* Perpetual bonds are still
fixed-income 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 university, private research university in New Haven, Connecticut. Established in 1701 as the Collegiate School, it is the List of Colonial Colleges, third-oldest institution of higher education in the United Sta ...
and interest was most recently paid by the eventual successor of Lekdijk Bovendams (
Hoogheemraadschap De Stichtse Rijnlanden
In the Netherlands, a water board, water council or water authority ( nl, waterschap or heemraadschap) is a regional governing body solely charged with the management of surface water in the environment. Water boards are independent of administr ...
) 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, whic ...
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. 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.
References
External links
"Perpetual debt in favour, but yields may fall" LiveMint.com, July 7, 2007
Bonds (finance)
{{Finance-stub