A bond is a loan investors make to a corporation, the federal government, a government agency, or a municipality. Most bonds offer investors regular fixed interest payments called “coupons” throughout the bond’s lifespan. The majority of bonds have a maturity date, which is when the investors’ principal is repaid, but perpetual bonds are non-redeemable.
Alternate names: perps, perpetual notes, consols, consol bonds
Investors often include bonds in their portfolios as a part of a broader investing strategy. Bonds are considered lower risk than investment options such as stocks, and can provide predictable returns. Perpetual bonds could conceivably provide returns for decades, centuries, or longer. The term is indefinite. In one example of this, Yale University acquired a 1648 perpetual Dutch water bond written on goatskin in 2003. As of 2015, it had continued paying interest. The original terms of the bond stated that it would pay 5% into perpetuity, although interest payments were reduced to 3.5%, then 2.5%.
How Does a Perpetual Bond Work?
A perpetual bond works much like a bond with a maturity date; however, it has the potential to pay returns indefinitely. While it has no redemption date, the issuer may redeem it at some point, as most perpetual bonds have a call feature. First, an investor purchases a bond that is issued by a government, corporation, or other organization. The issuer then agrees to repay the investors initial funds, along with interest, through fixed regular payments. The terms of the bonds, such as the specific interest rate, are established upfront and can vary from bond to bond. As with any other type of bond, holders of perpetual bonds have a higher-priority claim than shareholders if the issuer goes bankrupt. In another example of perpetual bonds in use, the U.K. government used perpetual bonds to pay for its debt from World War I. In May 2015, the U.K. announced it would pay off its remaining £1.9 billion of perpetual bonds issued as 3.5% war loans.
Pros and Cons of Perpetual Bonds
Pros Explained
Indefinite interest payments: Because perpetual bonds have no maturity date, they can theoretically provide investors with regular coupon payments forever. Source of fixed income: Like other types of bonds, perpetual bonds appeal to investors seeking regular fixed income. The terms of the bond, including the amount of interest payments, are determined before the bond is issued. Low-risk investment: While perpetual bonds are subject to credit risk and interest rate risk, the risk of investing is generally lower compared to the risks of stocks. Perpetual bondholders’ claims take precedence over shareholders’ claims in the event of a bankruptcy.
Cons Explained
Typically callable: Perpetual bonds generally have a call feature, which allows the issuer to redeem the bond after a certain amount of time has elapsed. Inflation risk: Investing in perpetual bonds carries inflation risk, which is the risk that your investment won’t earn enough to keep up with inflation. When this occurs, your money loses purchasing power. Opportunity cost: When you invest your money in perpetual bonds, there’s an opportunity cost because you could be missing out on potentially more profitable investments.
