Perpetual Subordinated Loan

DEFINITION of 'Perpetual Subordinated Loan'

A type of junior debt that continues indefinitely and has no maturity date. Perpetual subordinated loans pay creditors a steady stream of interest forever. Since the loan is perpetual, the principal is never repaid. The interest rate is based on the borrower's creditworthiness as well as prevailing market interest rates.

BREAKING DOWN 'Perpetual Subordinated Loan'

Because perpetual subordinated loans are a type of junior debt, they are relatively risky for the creditor. They are secondary to unsubordinated loans (senior loans), so if the borrower of a perpetual subordinated loan defaults, the creditor won't get repaid until the borrower's unsubordinated loans are repaid. Because of the increased risk associated with subordinated loans, they will have higher interest rates relative to unsubordinated loans. Creditors can use a present value calculation to determine the present value of a future series of perpetual subordinated loan payments.



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