Learn something new every day
More Info... by email
Perpetual bonds are bonds that do not have a set maturity date. Generally, the bonds cannot be redeemed at any point, but do generate some sort of return as long as the bond is held. As with any bond issue, it is possible for an investor to sell a perpetual bond if he or she wishes to do so, transferring all rights to future profits to the new bond owner.
The concept of a perpetual bond is not new. The British Treasury issued one of the oldest examples of this type of bond at the time of the Napoleon Wars in the early years of the 19th century. Today, the government of the United Kingdom continues to issue a type of this bond known as a consol. As was true in the past, the format for a perpetual bond is usually that of a callable bond, although some are not called for a number of years.
A perpetual bond yield is not unlike the type of profit that can be realized from the dividends paid on shares of stock. The basic perpetual bond formula includes a fixed coupon amount that is in turn divided by a discount rate that is predetermined to account in part for economic inflation. This helps to put a cap on the value of the bond over time, even though the return on the bond issue is in the form of interest.
The idea of a perpetual corporate bond is not unheard of. In fact, there are financial analysts and others that think the issue of perpetual bonds would be an excellent option for many governments to issue instead of the bond types that are currently issued by national and local governments in many places around the world. A perpetual callable bond would still serve the purposes of municipal bonds that are issued to finance building or other improvement projects within a local jurisdiction, but would allow greater flexibility in allowing the bond to be called at the jurisdiction’s discretion, rather than maturing on a preset date.
As with most types of bond issues, a perpetual bond tends to be a relatively stable investment that will continue to provide small amounts of profit for as long as the bond is active. This makes the bond an attractive option for investors who tend to be very conservative. However, a perpetual bond is never likely to yield a huge profit in a short period of time, characteristic that will turn off investors who are more willing to assume risk in return for the chance to realize a higher return.
Then, how is it that the deficit and debt-ridden governments in the advanced economies except for the UK have not issued the perpetual bonds, including Japan?