What Is Principal Exchange Rate Linked Security (PERL)?
A principal exchange rate linked security (PERL) is a type of debt security that pays interest semiannually and has a yield that is linked to foreign exchange rates. PERLs are denominated in U.S. dollars, but their repayment is determined by the exchange rate between the dollar and a specific foreign currency within a certain time frame. Many companies will purchase PERLs as a means of hedging against foreign exchange risk.
Understanding Principal Exchange Rate Linked Security (PERL)
Principal exchange rate linked securities (PERLs) are debt securities, or debt instruments bought or sold between two parties within defined terms, that make interest payments and have yield linked to the exchange rate of currencies. A PERL is a type of dual currency bond which pays the coupon and the principal in the base currency, but the variable principal payment is set by a redemption formula. By this formula, variable is linked to movements in currency exchange rates. The principal payments increase as the foreign currency appreciates relative to the base currency. The payments decrease as foreign currency declines.
Most commonly, a PERL has its principal and interest denominated in U.S. dollars. However, the principal repayment depends on the exchange rate of the dollar against the foreign currency. A company wishing to expand into foreign currency can safely do so via the purchase of PERLs, which allow for the currency to retain a link to the dollar.
Reverse PERLs are denominated in one currency but pay interest in another. With a reverse PERL the principal payments increase as the base currency appreciates relative to the foreign currency, and the payments decrease with the depreciation of the base currency. An example of a reverse PERL is a yen-denominated bond that pays interest in dollars. An investor’s yield would increase if the dollar appreciates against the yen, but the yield would decrease if the dollar falls in value.