What is a Perpetual Bond?
A perpetual bond is a debt with no maturity date. Investors may collect interest from these bonds indefinitely much as they would expect from a dividend-paying stock or preferred stock. Such a bond is also referred to as a "consol" or "perp."
How Does a Perpetual Bond Work? (Formula and Example)
A company may issue a perpetual bond which offers a coupon payment forever, at least theoretically. As long as the perpetual bond owner holds the bond(s), they will continue to receive interest.
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.
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