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. Perpetual Subordinated Loan

    A type of junior debt that continues indefinitely and has no ...
  6. Perpetual Option - XPO

    A non-standard financial option with no fixed maturity and no ...
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

    An Introduction to Individual Bonds

    Individual bonds are better than bond funds and can be a key component to one’s investment strategy.
  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

    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.
  6. Investing

    The Basics Of Bonds

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

    Understanding Periodic Vs. Perpetual Inventory

    An overview of the two primary inventory accounting systems.
  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.
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. How is perpetuity used in determining the intrinsic value of a stock?

    Learn about the basics of a perpetuity, its valuation, how it is calculated and how it is used when evaluating the intrinsic ... 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. Ex-Dividend

    A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be ...
  2. Debt Security

    Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount ...
  3. Taxable Income

    Taxable income is described as gross income or adjusted gross income minus any deductions, exemptions or other adjustments ...
  4. Chartered Financial Analyst - CFA

    A professional designation given by the CFA Institute (formerly AIMR) that measures the competence and integrity of financial ...
  5. Initial Coin Offering (ICO)

    An Initial Coin Offering (ICO) is an unregulated means by which funds are raised for a new cryptocurrency venture.
  6. The Bernie Madoff Story

    Bernie Madoff ran a multibillion-dollar Ponzi scheme that is considered the largest financial fraud of all time.
Trading Center