Perpetual bond

From Wikipedia, the free encyclopedia
Jump to: navigation, search

Perpetual bond, which is also known as a perpetual or just a perp, is a bond with no maturity date.[1] Therefore, it may be treated as equity, not as debt. Issuers pay coupons on perpetual bonds forever, and they do not have to redeem the principal. Perpetual bond cash flows are, therefore, those of a perpetuity.

Examples[edit]

Examples of perpetual bonds are consols issued by the UK Government. Most perpetual bonds issued nowadays are deeply subordinated bonds issued by banks. The bonds are counted as Tier 1 capital and help the banks fulfill their capital requirements. Most of these bonds are callable, but the first call date is never less than five years from the date of issue—a call protection period.

Pricing[edit]

Perpetual bonds are valued using the formula: \frac{i}{y} where i is Annual Coupon Interest on a bond and y is an expected yield for maximum term available. [2]

References[edit]

External links[edit]