A perpetual bond, also known colloquially as a perpetual or perp, is a
bond with no
maturity date,[1] therefore allowing it to be treated as
equity, not as
debt. Issuers pay
coupons on perpetual bonds forever, and they do not have to redeem the
principal. Perpetual bond
cash flows are, therefore, those of a
perpetuity.
Perpetual bonds vs. equity
Although similar to equity, perpetual bonds do not have attached votes and, therefore, provide no means of control over the issuer.
Perpetual bonds are still
fixed-income securities; therefore, paying coupons is mandatory whereas paying dividends on equity is discretionary.
Examples
Consols that were issued by the United States and the UK governments.
War bonds issued by a number of governments to finance war efforts in the first and second world wars.
The oldest example of a perpetual bond was issued on 15 May 1624 by the
Dutch water board of Lekdijk Bovendams.[2][3] Only about five such bonds from the
Dutch Golden Age are known to survive today.[4] Another of these bonds, issued in 1648, is currently in the possession of
Yale University. Yale bought the document for its history of finance archive at auction in 2003, at which time no interest had been paid on it since 1977. Yale Professor
Geert Rouwenhorst travelled in person to the Netherlands to collect the interest due.[4] Interest continues to accumulate on this bond, and was most recently paid in 2015 by the eventual successor of Lekdijk Bovendams (
Hoogheemraadschap De Stichtse Rijnlanden).[5] Originally issued with a principal of "1000 silver
Carolus gulders [
nl] of 20
Stuivers a piece", as of 2004 the yearly interest payment to the bondholder is set at €11.35. According to its original terms, the bond would pay 5% interest in perpetuity,[6] although the interest rate was reduced to 3.5% and then 2.5% during the 18th century.[7]
Most perpetual bonds issued in the present day are deeply subordinated bonds issued by banks. The bonds are counted as
Tier 1 capital and help the banks fulfill their
capital requirements. Most of these bonds are
callable, but the first call date is never less than five years from the date of issue—a call protection period.
Pricing
Perpetual bonds are valued using the formula:
where:
is an annual coupon interest on a bond.
is an expected yield for maximum term available.[8]