What is a Perpetual Bond?
How Does a Perpetual Bond Work? (Formula and Example)
Investors can calculate how much return they will earn from a perpetual bond by using the following formula:
Current Yield = (Annual Dollar Interest Paid) / (Market Price) X 100%
For example, let's say a perpetual bond has a par value of $100 with a coupon rate of 5% and is trading at a discounted price of $95.
Current Yield = [(0.05 x $100) / ($95)] X 100% = 5.26%
That means if you were to buy the perpetual bond at the discounted market price of $95 in this example, you would expect a 5.26% yield in perpetuity (forever).
Are Perpetual Bonds a Good Investment?
Although there is usually no set maturity date, perpetual bonds may be structured by the issuer 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.