What it is:
How it works (Example):
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.