What is a Perpetual Bond?

Many people who want to trade in securities often wonder what a perpetual bond is. Perpetual bonds are income securities that are fixed and have no maturity date. People love perpetual bonds because they generate a steady flow of interest payments forever. They are not redeemable, meaning the issuers do not repay the principal.

Breaking Down Perpetual Bonds

Perpetual bonds exist in a small niche of the market. This is mainly because there a few sectors of the economy where investors can safely put their money in a bond whose principal amount will never be repaid. A few examples of perpetual bonds in history include those that were issued by the South Sea Bubble in 1782 and the British Treasury during World War I.

Most perpetual bonds are issued by institutions owned by the government. Companies that are financially established and have a good corporate history can also issue perpetual bonds. One of the advantages of these bonds to companies is that they don’t have to pay back the principal. Since there is no requirement to pay the principal, the amount is not listed as a debt in the company’s balance sheet.

Determining the Value of Perpetual Bonds

Anyone who wants to invest in these bonds can know how much he will earn with a simple calculation. The price of the bond is determined by dividing the fixed interest payment by a discount. This discount reflects the rate at which money loses value over a certain period of time. For instance, bonds that pay $20,000 per year and have a discount rate of 5 percent will cost $400,000.

Benefits to Investors

Investors may like perpetual bonds because they have a steady flow of income. The interest payments take place on a fixed date without failure. Some bonds have a feature that increases the amount payable at a determined time in the future. This feature is known as growing perpetuity. It can increase the amount payable by up to 2 percent in a course of five to 10 years. Perpetual bonds may also have a periodic increase in interest rates. This could be after one or two years.

Who Should Invest in Perpetual Bonds?

Perpetual bonds are open to everybody. However, they are more suitable for those investors who have no source of income and need continuous cash flows. For instance, those who are going for retirement can find perpetual bonds very useful.

Possible Risks

Perpetual bonds are generally low-risk investments. This is because they are offered by governments and financially-established organizations. The possible risk investors could encounter is the constant fluctuation in interest rates. This can be a disadvantage if the bank interest rates rise over time and surpass the one issued in a perpetual bond. In such scenarios, the investor will have to sell the bond in the open market at a loss. Another notable risk is that these bonds may be called back by the issuer.

How to Buy Perpetual Bonds

There are several bonds available in the market today. Many of them are in foreign countries such as China, Britain and India. Simply search online, and you will get references to many dealers who specialize in perpetual bonds.

The returns on perpetual bonds are quite fair for those who are looking for a stable income over a long period of time. It is generally a good idea to invest in a perpetual bond if you have some cash lying idle in your account.