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Banking Term : Perpetual Bonds

Sep 17, 2015 17:46 IST

    A perpetual bond is introduced as a debt with no maturity date. A company has authority to  issue a perpetual bond offering a coupon which is valid forever, theoretically. These are used as a source of subordinated bonds and the issuer does not have to liberate perpetual bonds but is responsible for coupon payments.

    In contrast, Perpetual bonds have following Characteristics: -

    i. It is a financial instrument with no maturity date.

    ii. These Bonds are not redeemable, but pay a regular interest forever.

    iii. Lower pricing and lack of liquidity deter investors.

    iv. Perpetual Bonds come with tough regulations for dispensing dividends.

    v. These bonds are like quasi equity, having both features equity and debt.

    Benefits: - These bonds have the following benefits: -

    i. It offers steady and predictable resources of Money.

    ii. Payment is credited  step by step on the basis of a schedule.

    iii. It may offer increased periodic interest rate.

    Risks: - Besides benefits, Following risks are also associated with the perpetual bonds: -

    i. Carrying credit on a long term basis could be risky because as time passes, Bond Issuers including Governments and corporations , can get into financial trouble.

    ii. An Issuer can recall these bonds so that owner can not gain the expected amount of money.

    iii. A general interest rates may rise as the time passes. If rates increase significantly, the interest rate paid by such bonds may be much lower than the prevailing interest rate. It means the investors can earn more money instead of holding such bonds.

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