Perpetual bonds issued by public and private sector entities comprise a significant portion of the Indian bond market. With certain similarities to equity shares, these bonds offer a fixed periodic interest to the investors. To understand what are perpetual bonds elaborately and learn how to calculate the price and yield of such bonds, consider the details in the sections below.
Understanding Perpetual Bonds
Perpetual bonds are debt instruments with no maturity date. Investors receive a fixed interest payment from the issuer for an indefinite period as there is no maturity. These bonds are not redeemable.
The non-redeemable feature of perpetual bonds is similar to equity shares. As a result, you can compare dividend payout from equity shares to interest payout on perpetual bonds. Nevertheless, while coupon or interest payments on perpetual bonds are guaranteed, the dividend is not guaranteed.
To learn what are perpetual bonds in detail and identify the differences between these bonds and equity shares, continue reading the following sections.
Features of Perpetual Bonds
Here are the features to elaborate on what are perpetual bonds:
Infinite Coupon Payments
Perpetual bonds provide continuous interest or coupon payments. As long as you hold the bond as an investor, you will receive interest payments. This interest payout resembles dividend earning from equity, however, it is assured, unlike dividends.
Embedded Call Option
Perpetual bonds do not come with a maturity date. However, they have an embedded call option that allows issuers to buy back the bonds on a predetermined date.
No Yield to Maturity (YTM)
Yield to maturity is the return that investors earn if they hold a bond till maturity. As perpetual bonds do not have a maturity date, yield to maturity does not apply to these bonds.
No Return of the Principal
As perpetual bonds do not allow redemption facilities, the investors continue to receive interest payments. However, they do not receive the principal back if they continue to hold the bond. They can only recover the principal amount in the long term after multiple coupon payments.
Advantages of Investing in Perpetual Bonds
Now that you know what are perpetual bonds and their features, let us take a look at some advantages that you can avail by investing in them:
1. Reliable Income
Perpetual bonds continue to pay coupon payments or interest to investors as long as they hold the bond. This ensures a guaranteed, reliable and regular income for perpetual bondholders.
2. No Market-Linked Risk
Perpetual bonds are debt instruments with no associated market risk. However, these bonds might have interest rate risks which you need to consider while purchasing these bonds.
3. Higher Yields
As perpetual bonds are non-redeemable by investors, they offer a higher yield or coupon payment to compensate for the non-redeemable attribute and non-returnable principal.
How Do Perpetual Bonds Work?
Governments and financial institutions issue perpetual bonds to raise funds and in turn, provide a fixed coupon or interest payment semi-annually or annually. Investors continue to receive fixed interest unless the issuing authority redeems the bond. As a result, investors do not receive the principal back.
Even if the issuing authority redeems these bonds, they are not obligated to pay back the principal. In some cases, issuers can exercise the option to pay back the principal to the investors based on their convenience.
Although perpetual bonds usually fall in the secured investment category, they have underlying credit risks. If the market interest rates are higher than the coupon rates of bonds, investors might face a loss. Issuers might choose to offer a higher interest rate to investors for a fixed period to adjust to market rates.
Notably, despite significant differences between perpetual bonds and equity investment options, these bonds have certain similarities with stocks rather than traditional debt instruments. Thus, investors can reap benefits from their investment in perpetual bonds with shared features.
Do Coupon Payments Last Indefinitely?
Perpetual bonds do not have a maturity date. Moreover, investors are not eligible to redeem these bonds. As a result, they continue to receive the fixed interest or coupon payments as long as they hold the bond.
Here are the conditions for continuous coupon payment by the issuer of perpetual bonds:
- The issuer has to remain solvent.
- Concerned issuers should not have redeemed these callable bonds based on the call option.
- Even if the issuer redeems these bonds, it should not have paid back the principal to the investor.
List of Perpetual Bonds
Here are some of the examples of perpetual bonds in India:
| Bond Name | Rating | Coupon Rate | Payment Frequency | Maturity Date |
| L&T Finance Limited | CARE- AA+ | Reset Rate | Annually | 31st December 2099 |
| 11.50% TVS Credit Services Limited | CRISIL- AA- | 11.50% | Annually | 31st December 2099 |
| 9.56% State Bank of India | CRISIL- AA+ | 9.56% | Annually | 31st December 2099 |
| 9.75% Tata Motors Finance Limited | ICRA- AA- | 9.75% | Annually | 31st December 2099 |
| Poonawala Fincorp Limited | CARE- AA+ | Reset Rate | Annually | 31st December 2099 |
Who Issues Perpetual Bonds?
Here are the categories of issuers of perpetual bonds:
- Large Financial Institutions and Banks: These institutions issue perpetual bonds to increase their long-term capital base for Tier-1 capital ensuring financial stability.
- Big Corporations: These corporate houses issue perpetual bonds to fund giant projects or pay off loans.
- Governments: The Government issues these bonds to finance infrastructure projects or pay off public debt.
How to Calculate the Price and Yield of a Perpetual Bond?
Here is how to calculate the price and yield of a perpetual bond:
Calculation of Price of Perpetual Bond:
To calculate the price of a perpetual bond, you need to consider that the interest payments are continuous without any maturity date and no payback of the principal. As a result, you need to take into account a discount rate to derive the present value of these bonds.
For instance, if the coupon rate provided by the issuer is ₹20,000 each year and the discount rate is 4%, the price of the bond will be as follows:
Price (present value of the bond) = Periodic annual coupon payment / Discount rate = ₹20,000 / 4% = ₹5,00,000
Calculation of Yield of Perpetual Bonds:
As perpetual bonds do not have any maturity date, YTM (yield to maturity) is not applicable. You can calculate the current yield value using the formula mentioned below:
Current Yield = (Annual Coupon Payment / Price of the Bond) * 100
Consider the example below to understand bond yield calculation.
Suppose, Mr X purchased a perpetual bond of face value ₹1,000, at ₹850. The annual interest rate per annum on the bond is 7% amounting to ₹70 (₹1,000 * 7%) coupon payment each year.
Current Bond Yield = (₹70 / ₹850) * 100 = 8.23%
How to Invest in Perpetual Bonds?
You can follow the steps mentioned below to invest in perpetual bonds:
Step 1: Complete your KYC process by providing the required documents such as identity proof (PAN Card/Aadhaar Card) and address proof (Passport/Utility Bill).
Step 2: Choose the perpetual bond you want to invest in.
Step 3: Make payments using the available and convenient payment gateway to complete the process.
Who Should Invest in Perpetual Bonds?
Based on the financial goals, investment strategy and understanding of what are perpetual bonds, the following list of investor categories can consider investing in them:
1. Investors Looking for a Fixed Revenue Stream
Perpetual bonds provide regular and continuous coupon payments to investors as long as they hold the bond. As a result, if you are an investor looking for a fixed revenue stream to balance your income and expenses, it can be an ideal option for you. Retired individuals can choose to invest in perpetual bonds to earn continuous interest income.
2. Investors with Long-term Financial Goals
Perpetual bonds are non-redeemable. Moreover, these bonds do not have a maturity date unless the issuer considers a buyback of these bonds. As a result, investors with long-term financial goals can invest in these bonds to recover their principal in the long run through coupon payments.
3. Investors Looking for Stability
Perpetual bonds usually have fixed interest payments at regular intervals. This makes these bonds a stable investment option with comparatively lower risks. Thus investors looking for stability can invest in these bonds.
4. Institutional Investors
Large institutions often invest in perpetual bonds to earn regular coupon payments in the long term. For instance, an insurance company can invest in these bonds for steady revenue generation.
5. Investors Planning Portfolio Diversification
Perpetual bonds are low-risk debt instruments. Investors planning to diversify their portfolio can invest in these bonds to reduce the risk level of their portfolio by balancing equities and debts.
Final Word
To sum up what are perpetual bonds, it is noteworthy to mention that these bonds provide fixed interest payout to investors semi-annually or annually for an indefinite period. This is due to the ‘no maturity date’ feature of these bonds. However, if the issuer redeems these bonds exercising the call option and pays back the principal to the concerned investor, the interest payment stops. Notably, investors do not receive the principal back from the issuer if the bond continues to operate.
Frequently Asked Questions
Banks and companies issue perpetual bonds to raise funds. As these bonds do not have any maturity date, the issuing authorities can treat them as equity and use the capital for the long term.
While investors cannot directly redeem perpetual bonds, they can sell these bonds on the stock exchange. At the same time, the issuer can utilise the call option (if applicable) to buy back these bonds from investors.
There can be two risks associated with perpetual bond investments. In case the issuer becomes insolvent, it will not be able to pay the interest to the investors on the due date. In addition, if the inflation rate increases and is higher than the interest rate, investors will earn negative returns. Thus, in such a scenario, perpetual bonds fail to provide a hedge against inflation for the long term.
