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What is a Perpetual Bond?
A perpetual bond is a never-ending bond. They also don't have a maturity value. these bonds just pay the interests in the form of coupons for an indefinite period. Since the interest is paid for theoretically forever, the bond is named perpetual meaning forever.
Considerations
A perpetual bond is an obligation. It is an obligation only in name because the issuer doesn't have to pay the lump sum and only interests are paid forever.
Sometimes, perpetual bonds are preferred instead of dividend stocks. However, the similarities between the two are extremely limited.
Dividend interests are not mandatory to be paid. That is in the case of dividend payments, there are subtle fluctuations while in the case of dividend bonds, the payment is fixed.
Perpetual bonds are more like annuities. In the case of the latter, interests are paid regularly forever while in the case of the former, coupon payments are made regularly.
Advantages of Perpetual Bonds
It is a dependable source of regular income.
There is no need to pay attention to bond maturities.
There is no need to deal with re-investing.
Payments are higher than regular bonds.
Disadvantages of Perpetual Bonds
Issuers can call the bond any time.
People may miss better investment options.
Exposure to issuers credit risk or unknown credibility.
Inflation may affect the interest rates.
Perpetual Bond issuers
Perpetual bonds are very rare nowadays and only governments and bank entities provide perpetual bonds. This helps the entities meet their capital requirements. The capital raised via perpetual bonds is known as Tier 1 Capital.
According to some economists, perpetual bonds are excellent for raising money. However, some say that there is no point in creating debt that has to be paid forever. It might affect the fiscal and economic policies of the entities.
Do the Issuers Pay Forever?
The answer to this question is both yes and no. In the cases of perpetual bonds, the issuers usually continue with coupon payments forever. And, the payments are usually regular too. However, in some cases, the issuers can call and redeem the bonds. The issuers of bonds still get benefits as the perpetuities do not have a fixed and permanent redemption date.
Calculation of the Yield
The current yield on perpetual bonds is equal to the total number of coupons received annually divided by the market value of the bond multiplied by 100.
For example, assume that one has invested in a perpetual bond with a par value of INR 1,000 by purchasing the bond at a discounted price of INR 950. He/she receives a total of INR 80 per year in coupon payments.
$$ Current\:Yield = \frac{80}{950}× 100 = 8.42 % $$
The current yield from the bond is 8.42 %.
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