Perpetual Bond
IntermediateA perpetual bond is a bond with no maturity date, which pays interest indefinitely and whose principal does not have to be repaid, although the issuer may have the right to redeem it.
Most bonds repay their face value on a set date. A perpetual bond, also called a perpetual or a consol, continues paying interest for as long as it exists.
Its value can be estimated as a perpetuity: the annual interest divided by the required yield. For example, a perpetual bond paying 50 a year, when investors require a 6% yield, would be worth about 833.
Perpetual bonds are commonly issued by banks and insurers, often as a form of capital that can absorb losses, such as Additional Tier 1 bonds. These usually include call options allowing the issuer to redeem them after a set period, and may allow interest payments to be cancelled or the bonds to be written down in a crisis.
Perpetual bonds are very sensitive to interest rate changes, because their cash flows extend indefinitely. They also carry the issuer’s credit risk. In 2023, the write-down of Credit Suisse’s Additional Tier 1 bonds to zero, as part of its rescue, showed the risks of loss-absorbing perpetual bonds.
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