When companies and governments aspire to raise money, they may issue bonds. Investors who purchase those bonds are essentially extending loans to the issuing entities. In this situation, in exchange for these loans, the issuer agrees to make interest payments to 澳洲幸运5官方开奖结果体彩网:the bond buyer, for a specific period.

As the name suggests, with perpetual bonds, the agreed-upon period over which interest will be paid, is forever—澳洲幸运5官方开奖结果体彩网:perpetuity. In this respect, perpetual bonds function similarly to dividend-paying stocks or certain preferred securities. Just as owners of such stock receive dividend payments for the entire time the stock is held, perpetual bond owners receive interest payments, for as long as they hold onto the bond.

Calculating Perpetual Bond Value

Investors can determine what they will earn (ꦑthe bond’s yield if held until maturity) by performing a relatively simple calculation, using the following formula:

$\text{Current Yield} = \frac{\text{Annual Dollar Interest Paid}}{\text{Market Price}}*100\%$Current Yield=Market PriceAnnual Dollar Interest Paid​∗100%

As an example, a bond with a $100 澳洲幸运5官方开奖结果体彩网:par value, paying a 澳洲幸运5官方开奖结果体彩网:coupon rate of 5%, and trading at the discounted price of $95.92 would have a 澳洲幸运5官方开奖结果体彩网:current yield of 5.21%. Thus the calcu💜lation would be as followꦐs:

$\frac{(\$100*0.05)} {\$95.92} * 100\% = 5.21\%$$95.92($100∗0.05)​∗100%=5.21%

Keep in mind that perpetual bonds have no 澳洲幸运5官方开奖结果体彩网:maturity date, therefore payments theoretically continue forever.

Since money loses value over time, due to inflation and other causes, over time, the interest rate payments made by a perpetual bond have less value to investors. The price of a perpetual bond is, therefore, the fixed interest payment, or coupon amount, divided by the 澳洲幸运5官方开奖结果体彩网:discount rate, with the discount rate representing the speed at which money loses value over time. For perpetual bওonds that offer growing perpetuity, yet another mathematical formul🙈a can be employed to determine its value.

A History of Perpetual Bonds

The British government is widely credited with creating the first perpetual bond, back in the 18th century. Although they’re currently not nearly as popular as 澳洲幸运5官方开奖结果体彩网:Treasury bonds and 澳洲幸运5官方开奖结果体彩网:municipal bonds, many economists believe perpetual bonds are attractive capital raising solutions for indebted global governm🍌ents. On the other hand, fiscal conservatives generally oppose the prospect of issuing any debt – let alone bonds that perpetually pay interest to holders. Nevertheless, perpetual bonds are recognized as a v🌠iable money-raising solution, during troubled economic times.

The Appeal of Perpetual Bonds

Perpetual bonds fundamentally afford fiscally-challenged governments ꦿan opportunity to raise money without the obligation of paying it back. Several factors support this phenomenon. Primarily, interest rates are extraordinarily low for longer-term debt. Secondly, in periods of rising inflation, investors actually lose money on loans they make to governments.

For example, when investors receive a 0.5% interest rate, where inflation is 1%, the resulting inflation-adjusted interest rate of return is -0.5%. Consequently, when investors receive money back from the government, their 澳洲幸运5官方开奖结果体彩网:buying power is drastically diminished.

Consider a scenario where an investor loans the government $100, and one year later, the investment's value climbs to $100.50, courtesy of the 0.5% interest rate. However, due to a 1% inflation rate, it now requires $101 to purchase the same 澳洲幸运5官方开奖结果体彩网:basket of goods that cost just $100 one year ago, therefore the investor’s 澳洲幸运5官方开奖结果体彩网:rate of return fails to keep pace with rising inflation.

Most economists expect inflation to increase over time. As such, lending out money at a hypothetical 4% interest rate seems like a bargain to government bean counters, who believe the future inflation rate could spike to 5% in the near future. Of course, most perpetual bonds are issued with 澳洲幸运5官方开奖结果体彩网:call provisions that let issuers make 澳洲幸运5官方开奖结果体彩网:repayments after a designated time period. In this regard, the “perpetual” part of the package is often a choice, rather than a mandate, because issuers can effectively squash the perpetual obligation if they have enough cash on hand to repay the loan in full.

Benefits of Perpetual Bonds

Perpetual bonds are of interest to investors because they offer steady, predictable sources of income, with payments made on a set schedule. Furthermore, some perpetual bonds boast “step-up” features that increase the interest payment at predetermined points in the future. Technically referred to as “growing perpetuity,” this function can be quite lucrative for investors. For example, perpetual bonds may increase their yield by 1% after 10 years. They may similarly offer 澳洲幸运5官方开奖结果体彩网:periodic interest rate increases. Therefore, investors should pay close attention to any step-up provisions, when comparison-shopping for dif🍎ferent perpetual bond offerings.

Risks of Perpetual Bonds

There are risks associated with perpetual bonds. Notably, they subject investors to perpetual credit risk exposure, because as time progresses, both governmental and corporate bond issuers can encounter financial troubles, and theoretically even shut down. Perpetual bonds may also be subject to 澳洲幸运5官方开奖结果体彩网:call risk, which means that issuers can recall them. Finally, there is the ever-present risk of the general interest rates rising over time. In such cases where the perpetual bond’s locked in interest is significantly lower than the current interest rate, investors could earn more money by holding a different bond. However, to swap out an old perpetual bond for a newer, higher interest bond, the investor must sell their existing bond on the open market, at which time it may be worth less than the 澳洲幸运5官方开奖结果体彩网:purchase price because investors discount their offers based on the 澳洲幸运5官方开奖结果体彩网:interest rate differential.

The Bottom Line

If perpetual bonds have sparked your interest, there are copious opportunities to fold them into your investment portfolio, including overseas offerings in markets such as India, China, and the Philippines. A quick online search can easily refer you to such investments, like those issued by Ayala Corporation, Agile Property Holdings and Reliance Industries. Investors may also consult with brokers, who can furnish lists of offeringღs, and highlight the pros and cons of specific securities.