Perpetual bonds
Encyclopedia
Perpetual bond, which is also known as a Perpetual or just a Perp, is a bond with no maturity date. Therefore, it may be treated as equity, not as debt. Perpetual bonds pay coupon
s forever, and the issuer does not have to redeem them. Their cash flows are, therefore, those of a perpetuity
.
Examples of perpetual bonds are consols
issued by the UK Government. Most perpetual bonds issued nowadays are deeply subordinated bonds issued by banks. The bonds are counted as Tier 1 capital
, and help the banks fulfil 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.
where 
is an expected yield for maximum term available and 
is Annual Coupon Interest on a bond.
Coupon (bond)
A coupon payment on a bond is a periodic interest payment that the bondholder receives during the time between when the bond is issued and when it matures. Coupons are normally described in terms of the coupon rate, which is calculated by adding the total amount of coupons paid per year and...
s forever, and the issuer does not have to redeem them. Their cash flows are, therefore, those of a perpetuity
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...
.
Examples of perpetual bonds are consols
Consols
Consol is a form of British government bond , dating originally from the 18th century. The first consols were originally issued in 1751...
issued by the UK Government. Most perpetual bonds issued nowadays are deeply subordinated bonds issued by banks. The bonds are counted as Tier 1 capital
Tier 1 capital
Tier 1 capital is the core measure of a bank's financial strength from a regulator's point of view. It is composed of core capital, which consists primarily of common stock and disclosed reserves , but may also include non-redeemable non-cumulative preferred stock...
, and help the banks fulfil their capital requirements. Most of these bonds are callable
Callable bond
A callable bond is a type of bond that allows the issuer of the bond to retain the privilege of redeeming the bond at some point before the bond reaches the date of maturity. In other words, on the call date, the issuer has the right, but not the obligation, to buy back the bonds from the bond...
, 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 expected yield for maximum term available and is Annual Coupon Interest on a bond. External links
- "Perpetual debt in favour, but yields may fall", LiveMint.com, July 7, 2007