Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Perpetual Bond

What it is:

A perpetual bond is a debt with no maturity date. Such a bond is also referred to as a "consol."

How it works (Example):

A company may issue a perpetual bond which offers a coupon payment forever, at least theoretically. The issuer does not have to redeem perpetual bonds, but is responsible for coupon payments.  

Perpetual bonds are used as a source of subordinated debt. Since it does not have to be repaid, it is considered a source of Tier 1 capital (i.e. equity capital and disclosed reserves) for banks. For banks, perpetual bonds help to fulfill the bank's capital reserve requirements. Even though they are technically a form of debt, they qualify as "equity" on the bank balance sheet

Although there is usually no set maturity date, perpetual bonds may be structured to allow the bonds to be callable after a set period of time, usually between 5 and 10 years. This is especially important if the interest rates fall sharply and the issuer needs to reduce the interest cost.

Why it Matters:

Historically, perpetual bonds have paid a higher than normal yield on comparable debt quality. As a result, in a competitive market, they are an attractive source of capital.

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