What is a 'Perpetual Bond'

A perpetual bond is a fixed income security with no maturity date. One major drawback to these types of bonds is that they are not redeemable. Given this drawback, the major benefit of them is that they pay a steady stream of interest payments forever. A perpetual bond is also known as a "consol" or a "perp".

BREAKING DOWN 'Perpetual Bond'

These types of bonds exist within a small niche of the bond market. This is mainly due to the fact that there are very few entities that are safe enough for investors to invest in a bond where the principal will never be repaid. Some of the notable perpetual bonds in existence are those that were issued by the British Treasury for World War 1 and the South Sea Bubble of 1720. Some in the U.S. believe it would be more efficient for the government to issue perpetual bonds, which may help it avoid the refinancing costs associated with bond issues that have maturity dates.

Perpetual Bond Valuation and Examples

Since perpetual bond payments are similar to stock dividend payments, as they both offer some sort of return for an indefinite period of time, it is logical that they would be priced the same way. The price of a perpetual bond is therefore the fixed interest payment, or coupon amount, divided by some constant discount rate, which represents the speed at which money loses value over time (partly due to inflation). The discount rate denominator reduces the real value of the nominally fixed coupon amounts over time, eventually making this value equal zero. As such, perpetual bonds, even though they pay interest forever, can be assigned a finite value, which in turn represents their price.

The formula for the present value of a perpetual bond is simply:

Present value = D / r

Where:

D = periodic coupon payment of the bond

r = discount rate applied to the bond

For example, if a perpetual bond pays $10,000 per year in perpetuity and the discount rate is assumed to be 4%, the present value would be:

Present value = $10,000 / 0.04 = $250,000

Note that the present value of a perpetual bond is highly sensitive to the discount rate assumed since the payment is known as fact. For example, using the above example with 3%, 4%, 5% and 6% discount rates, the present values are:

Present value (3%) = $10,000 / 0.03 = $333,333

Present value (4%) = $10,000 / 0.04 = $250,000

Present value (5%) = $10,000 / 0.05 = $200,000

Present value (6%) = $10,000 / 0.06 = $166,667

RELATED TERMS
  1. Delayed Perpetuity

    A perpetual stream of cash flows that start at a predetermined ...
  2. Perpetuity

    A constant stream of identical cash flows with no end. The formula ...
  3. Perpetual Preferred Stock

    A type of preferred stock that has no maturity date. The issuers ...
  4. Discount Bond

    A bond that is issued for less than its par (or face) value, ...
  5. Bond

    A debt investment in which an investor loans money to an entity ...
  6. Bond Discount

    The amount by which the market price of a bond is lower than ...
Related Articles
  1. Investing

    Perpetual Bonds: An Overview

    A perpetual bond makes interest payments to the investor forever. This type of bond holds a certain appeal to both the issuer and buyer.
  2. Investing

    Understanding Perpetuity

    Perpetuity means without end. In finance, a perpetuity is a flow of money that will be received on a regular basis without a specified ending date.
  3. Investing

    Understanding Bond Prices and Yields

    Understanding this relationship can help an investor in any market.
  4. Financial Advisor

    Using Excel PV Function to compute Bonds PV

    To determine the value of a bond today - for a fixed principal (par value) to be repaid in the future at any predetermined time - we can use an Excel spreadsheet.
  5. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  6. Investing

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
  7. Investing

    The Basics Of Bonds

    Bonds play an important part in your portfolio as you age; learning about them makes good financial sense.
  8. Investing

    Investing in Bonds: 5 Mistakes to Avoid in Today's Market

    Investors need to understand the five mistakes involving interest rate risk, credit risk, complex bonds, markups and inflation to avoid in the bond market.
  9. Investing

    How To Evaluate Bond Performance

    Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
  10. Investing

    Corporate Bonds: Advantages and Disadvantages

    Corporate bonds can provide compelling returns, even in low-yield environments. But they are not without risk.
RELATED FAQS
  1. Is Social Security Income a perpetuity?

    Find out why Social Security income is not classified as a perpetuity, including what constitutes a perpetuity and the basics ... Read Answer >>
  2. What are the differences between an annuity derivation and perpetuity derivation ...

    Understand the differences between an annuity derivation and perpetuity derivation of the time value of money. Learn the ... Read Answer >>
  3. For $800,000 invested today, an insurance company promises to start making perpetual ...

    The correct answer is: A) We must first link the $800,000 today to the period when the perpetuity payments will begin. In ... Read Answer >>
  4. What determines the price of a bond in the open market?

    Learn more about some of the factors that influence the valuation of bonds on the open market, and why bond prices and yields ... Read Answer >>
Hot Definitions
  1. Trumponomics

    Trumponomics is a term for the economic policies of President-elect Donald Trump.
  2. Universal Health Care Coverage

    An organized healthcare system that provides healthcare benefits to all persons in a specified region. Many countries, such ...
  3. Davos World Economic Forum

    The annual meeting of the World Economic Forum hosted at Davos—a small ski town in Switzerland—in January each year is among ...
  4. Smart Home

    A convenient home setup where appliances and devices can be automatically controlled remotely from anywhere in the world ...
  5. Efficient Frontier

    A set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a ...
  6. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
Trading Center