Perpetual bonds are capital-raising instruments that do have any maturity date as bonds typically do. Although perpetual bonds are considered to be debt instruments, the obligation to repay the debt is not binding. As an alternative, perpetual bonds offer to pay their holders interest at a fixed date endlessly. If perpetual bonds continue to make payments, their issuers are not obliged to repay the principal amount of the debt.
In reality, a perpetual bond issuer usually does have the option to redeem the bond after a certain period, such as, for example, after 10 years after the issue date, and some issuers of perpetual bonds redeem their bonds after a while.
Investors wonder if the coupon payments on perpetuals really go on forever and ever if the issuer does not redeem the bond. Several well-known examples testify to this effect.
A perpetual bond issued in 1648 by the Water Board of the Dutch city of Lekdijk Bovendams was still making coupon payments to its holders in 2015. In 1753 the bank of England debuted with perpetual bonds, and these bonds are still traded on the London Stock Exchange at a coupon rate of 2.5 % per annum. In 1923, Parliament published a decree that these bonds can be redeemed at any time when the government considers it necessary. In 1993 Coca-Cola Corporation issued a perpetual bond with the maturity date of 2093 and a coupon rate of 7.3 % per annum.
The main advantage of perpetual bonds for investors is that they pay the fixed rate of return for a long time, and from this perspective, they are similar to annuities, or rent payments. However, it is important to remember that the level of income from perpetual bonds is strongly contingent on the prevailing interest rates in the country. When the interest rates increase, the yield from the perpetual bonds declines, and investors start facing risks of losing money with these bonds. Therefore, investors consider these perpetual bonds a risky investment unless the issuer has a solid reputation on the market.
In our next post on the capital markets, we will examine how to figure out the yield on perpetual bonds. Bear with us, and you will gain many useful tips and insights about diverse aspects of the capital markets.