Perpetual Bonds Explained: 2025 Prices and Investment Insights

Andy Smith is a Certified Financial Planner (CFP®), licensed realtor, and educator with over 35 years of experience in personal finance, corporate finance, and real estate. He has guided thousands of clients toward achieving their financial goals.

When governments and corporations seek capital, they often issue bonds—essentially loans from investors to issuers. Typically, these bonds pay interest for a fixed term. However, perpetual bonds differ by providing interest payments indefinitely, without a maturity date.

Much like dividend-paying stocks or preferred shares, holders of perpetual bonds receive continuous interest payments as long as they retain the bond.

Key Points to Remember

• Perpetual bonds pay interest forever, with no fixed maturity date.
• They serve as effective fundraising tools, especially during economic uncertainty.
• Investors face ongoing credit risks, as issuers might encounter financial distress.

How to Calculate the Value of a Perpetual Bond

Investors can estimate the yield of a perpetual bond using a straightforward formula:

Current Yield = (Annual Interest Payment / Market Price) × 100%

For example, a bond with a $100 face value, a 5% coupon, and trading at $95.92 yields approximately 5.21%:

( $100 × 0.05 ) / $95.92 × 100% = 5.21%

Since these bonds never mature, their payments theoretically continue forever. However, inflation reduces the real value of these payments over time. The bond’s price is generally calculated as the coupon payment divided by the discount rate, which reflects the rate at which money loses value.

The Origins of Perpetual Bonds

The first known perpetual bonds were issued by the British government in the 18th century. While less common today than Treasury or municipal bonds, they remain a valuable option for governments facing debt challenges. Fiscal conservatives often oppose perpetual debt issuance, but these bonds are recognized for their utility during financial crises.

Interesting Fact

Yale’s Beinecke Rare Book & Manuscript Library holds a bond from the Dutch water authority Stichtse Rijnlanden, issued in 1648, which still pays interest today.

Why Investors Are Drawn to Perpetual Bonds

Perpetual bonds offer governments a way to raise funds without the obligation to repay principal. This is especially appealing when long-term interest rates are historically low. Additionally, during inflationary periods, the real returns for investors can become negative, as interest payments fail to keep pace with rising prices.

For instance, an investor earning 0.5% interest when inflation is 1% effectively loses purchasing power. If $100 grows to $100.50 after one year, but the cost of goods rises to $101, the investment’s real value declines.

Many perpetual bonds include call options allowing issuers to repay the debt early, making the "perpetual" aspect conditional rather than absolute.

Advantages of Investing in Perpetual Bonds

These bonds provide consistent income streams with scheduled payments. Some also feature "step-up" clauses that increase interest rates at set intervals, enhancing investor returns over time.

• Reliable, predictable income with scheduled interest payments.
• Potential for increased interest rates through step-up provisions.

Considerations and Risks

Investors must be aware of continuous credit risk since issuers might face financial difficulties indefinitely. Call risk is also present, where issuers can redeem bonds before investors desire. Furthermore, rising market interest rates can reduce the market value of existing perpetual bonds, potentially leading to capital losses if sold.

Final Thoughts

Perpetual bonds can diversify investment portfolios and provide steady income, especially in international markets like India, China, and the Philippines. Popular issuers include Ayala Corporation, Agile Property Holdings, and Reliance Industries. Investors should consult financial advisors or brokers to explore offerings and assess suitability based on individual goals.

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