Perpetual Bonds

Discussion in 'Fixed Income' started by DallasCowboysFan, Jun 4, 2020.

  1. A perpetual bond is something that does not have a maturity date.
    I don't think they are that popular and I can't say I have seen them discussed much.
    A perpetual bond, also known as a "consol bond" or "prep," is a fixed income security with no maturity date. This type of bond is often considered a type of equity, rather than debt. One major drawback to these types of bonds is that they are not redeemable. However, the major benefit of them is that they pay a steady stream of interest payments forever

    The price of a perpetual bond is, therefore, the fixed interest payment, or coupon amount, divided by some constant discount rate, which represents the speed at which money loses value over time (partly due to inflation). The discount rate denominator reduces the real value of the nominally fixed coupon amounts over time, eventually making this value equal zero. As such, perpetual bonds, even though they pay interest forever, can be assigned a finite value, which in turn represents their price.

    If they are not redeemable then they cannot be returned to whoever issued them.
    So you have to sell them on the open market.
    But , if they have a fixed rate of return, then the return declines every year with inflation.
    So I guess you would have to sell it to someone else if you wanted to cash out if you thought the return was too low?
    And the risk would be relfected in the discount rate?
    If it does not have a maturity, then wouldn't the return eventually be zero, unless it is sold for pennies on the dollar 10,20, or 50 years down the road?
  2. xandman


    There is nothing special about a a perpetual bond. In the private sector, that role is filled by Perpetual Preferred Stock. Governments are more likely to use a perpetual/console bond.

    The return does not decline every year with inflation, these are usually issued at a fixed coupon. We say that the real return is smaller after inflation. Same goes with most investments.

    It will go to Par, it will not return to zero. That would be an "amortized" bond like a mortgage. I think the most important risk factor we should worry about is the effective duration of a perpetuity.

    The easiest calculation in fixed income: (1+ interest rate)/interest rate
  3. I wonder what percentage of perpetual bonds exists for the total bond market?
    We don't hear too much about them.
  4. xandman


    PPS is 1 trillion. HY is 1.5 trillion. A guess: 200 billion / 200 trillion = .1%.

    Additionally, "In 2015, the British government decided to redeem all consols in circulation." - FRED.

    There seems to be some chatter about it in some Finance mags on the internet.
    DallasCowboysFan likes this.