Perpetual Bonds

Perpetual bonds are debt instruments that do not have a fixed maturity date. Investors may continue receiving coupon payments for an indefinite period, although payments depend on the terms of the bond and the issuer’s ability or obligation to pay.

• Perpetual bonds generally do not have a fixed date for repayment of principal.
• Many perpetual bonds include a call option that may allow the issuer to redeem them according to specified terms.
• They do not have a conventional yield to maturity because there is no fixed maturity date.
• Their prices can change when market interest rates and other market conditions change.
• The value of a simple perpetual bond can be estimated by dividing its annual coupon payment by the required discount rate.
• Some qualifying perpetual debt instruments issued by banks may form part of Additional Tier 1 capital.
   

A perpetual bond is a type of debt instrument that does not have a fixed maturity date. The issuer may continue making coupon or interest payments for an indefinite period, depending on the terms of the bond.
Since there is no fixed maturity date, the principal does not automatically become repayable on a particular date. However, some perpetual bonds have call options that allow the issuer to redeem them under specified conditions.
Perpetual bonds have some characteristics that may resemble equity because both can remain outstanding indefinitely. However, a perpetual bond remains a debt instrument rather than an equity share.
Coupon payments on perpetual bonds can be compared with dividends because both provide payments to investors. However, coupon payments should not be considered universally guaranteed. For example, certain bank-issued AT1 perpetual instruments allow the bank to cancel coupon payments under specified conditions.
 

Perpetual bonds work in many ways like regular bonds, but their lack of a fixed maturity date gives them some distinct features.

1. Indefinite coupon payments

A perpetual bond may continue paying coupons for as long as the bond remains outstanding. However, these payments depend on the bond terms and the issuer’s financial position.
For some perpetual instruments, particularly qualifying bank AT1 instruments, coupon payments can be cancelled under specified circumstances.

2. Embedded call option

Many perpetual bonds come with a call option. This gives the issuer the right to redeem the bond according to the conditions and dates mentioned in the bond terms.
A call option does not necessarily mean the issuer can redeem the bond at any time. The exact conditions depend on the particular bond.

3. No conventional yield to maturity

Yield to maturity, or YTM, estimates the return from holding a bond until its maturity date.
Since perpetual bonds do not have a fixed maturity date, they do not have a conventional YTM. Other measures, such as current yield, may instead be used to understand the income generated by the bond.
For AT1 bonds held by mutual funds, SEBI specified a Yield to Call-based valuation methodology from August 2024.

4. No fixed date for return of principal

A perpetual bond has no scheduled maturity date on which the principal must automatically be repaid.
However, this does not always mean that investors can never receive their principal. If the bond has a call option and the issuer exercises it according to the bond terms, the bond may be redeemed.
 

Perpetual bonds are fixed-income securities designed without a fixed maturity date. The issuer may continue paying interest while the bond remains outstanding, subject to the terms of the instrument.
The interest payments are known as coupons. Depending on the bond terms, these may be paid annually or semi-annually.
For example, suppose a perpetual bond pays an annual coupon of ₹20,000. If the bond remains outstanding and the coupon continues to be paid, you may keep receiving ₹20,000 each year.
The market price of a perpetual bond can also change. For example, when prevailing interest rates rise, an existing bond offering a lower coupon may become less attractive, which can put downward pressure on its market price.
Some perpetual bonds also include a call option. If the conditions specified in the bond are met, the issuer may choose to redeem the bond instead of keeping it outstanding indefinitely.
 

In theory, a perpetual bond can continue paying coupons indefinitely because it has no fixed maturity date.
In practice, however, payments do not necessarily continue forever. They depend on the terms of the bond, the issuer’s financial position, and whether the bond is redeemed through a call option.
For example, if an issuer exercises a permitted call option and redeems the bond, future coupon payments stop.
Certain bank-issued AT1 perpetual debt instruments can also carry additional risks. RBI rules require qualifying AT1 instruments to include loss-absorption features, and banks may have discretion to cancel coupon payments under specified conditions.
Therefore, investors should not assume that every perpetual bond provides guaranteed coupon payments forever.
 

A simple perpetual bond can be valued by calculating the present value of its continuing coupon payments.
The formula is:
Present value of a perpetual bond = Annual coupon payment ÷ Discount rate
For example, suppose the annual coupon payment is ₹20,000, and the appropriate discount rate is 4%.
Present value of the bond
= ₹20,000 ÷ 4%
= ₹5,00,000
This means that using a 4% discount rate, the calculated present value of the perpetual stream of ₹20,000 annual payments is ₹5,00,000.
 

Although a perpetual bond does not have a conventional YTM, you can calculate its current yield.
The formula is:
Current yield = (Annual coupon payment ÷ Market price of the bond) × 100
For example, if a bond pays ₹20,000 annually and its current market price is ₹5,00,000:
Current yield
= (₹20,000 ÷ ₹5,00,000) × 100
= 4%
The current yield shows the annual coupon income as a percentage of the bond’s current price.
 

Perpetual bonds form a relatively specialised part of the bond market. They may be issued by financial institutions and other eligible issuers depending on the type of instrument.

Banks may issue qualifying perpetual debt instruments to strengthen their regulatory capital. Under RBI's Basel III framework, eligible perpetual debt instruments can form part of Additional Tier 1, or AT1, capital.

Companies may also use perpetual securities to raise long-term capital for their funding requirements.

The exact purpose and conditions depend on the issuer and the terms of the particular bond.

Read more: What are debentures

Like other investment avenues, perpetual bonds have potential benefits as well as risks. Some of their main benefits include:

1. Regular income

Perpetual bonds may provide regular coupon income while the bond remains outstanding.
For example, if a bond pays an annual coupon of ₹20,000 and continues to make payments, you receive that coupon according to the payment schedule. However, investors should check whether the bond terms allow coupons to be cancelled or deferred.

2. Income is not directly linked to equity returns

Perpetual bonds are debt instruments, so their coupon structure is different from the returns earned from equity shares.
However, this does not mean they have no market risk. Their market prices may change because of interest rates, the issuer’s credit position, liquidity and other market conditions.

3. Potentially higher yields

Perpetual bonds may offer higher coupon rates or yields than some conventional debt instruments to compensate investors for risks such as the absence of a fixed maturity date.
The actual yield depends on the bond's terms, market price, and issuer.
 

Perpetual bonds have a distinct structure and may suit investors who understand their long-term nature and associated risks.

Investors looking for regular income

Investors looking for periodic income may consider perpetual bonds because they can provide coupon payments while the instrument remains outstanding.
However, you should check the bond terms carefully because payments may not always be guaranteed.

Long-term investors

Since perpetual bonds have no fixed maturity date, they may suit investors who are prepared to hold debt securities for a long period.
For example, an investor may continue holding the bond and receiving coupons unless the issuer exercises a call option or another condition in the bond terms applies.

Stability-seeking investors

Some investors may consider bonds when they want an asset that behaves differently from equity shares.
However, perpetual bonds are not risk-free. Their market value can fluctuate, and investors may face interest-rate, credit and liquidity risks.

Large institutions

Institutional investors may use perpetual bonds as part of a long-term investment portfolio and receive coupon income while the instruments remain outstanding.
Their suitability depends on the institution's investment objectives and the specific terms of the bond.

Investors seeking diversification

Perpetual bonds may also form part of a diversified portfolio because their structure differs from ordinary shares and conventional bonds.
However, diversification does not remove the risks associated with the issuer or the particular perpetual bond.
 

Perpetual bonds are debt instruments without a fixed maturity date, so they may remain outstanding and pay coupons for an indefinite period. However, coupon payments and repayment of principal depend on the bond terms.
Before investing, carefully check the issuer’s creditworthiness, call provisions, coupon conditions and other risks. This is especially important for perpetual instruments such as bank AT1 bonds, which can contain coupon-cancellation and principal loss-absorption provisions.