What are perpetual bonds?

by Manshu on November 2, 2011

in Articles

Perpetual bonds are bonds that don’t have a maturity date, and to compensate for the fact that investors can never redeem them – they pay a higher rate than other bonds with a similar credit profile.

They are not all that popular and I could not find references of many perpetual bond issues, and there seem to be more dollar denominated perpetual bond issues than rupee denominated ones.

The company that issues the perpetual bonds normally has an option to call them which means that they can decide to redeem the bonds at the end of certain time periods say 5 or 10 years, and the Tata Steel perpetual bond issue had a step up option also which means that if the bond is not called within a certain time frame then the company will have to pay a higher rate of interest on them. They issued the bonds at 11.8%, and if the company didn’t call the bonds within 10 years then the coupon rate would increase by 300 basis points.

They are supposed to be listed on the stock exchange also, but from what I can see there isn’t any trading in them at all. If you know of a perpetual bond that is listed on an exchange then please leave a comment here.

While this may be of interest to pension funds and institutional investors, I don’t see any value in this for retail investors.

I can’t think of a single situation where someone will be better off with one or two extra percentage points in interest income every year with the trade off that they may never see their capital back. That doesn’t appeal to me at all.

These bonds are good for banks and other companies to raise money and shore up their capital and also good for pension funds who would like to lock on to the high interest rates, and if they got the principal redeemed then they anyway need to re-invest it in another instrument, but as far as retail investors are concerned – I don’t see any utility in them.

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