Perpetual Bonds

Perpetual Bonds are debt securities without maturity dates that pay coupons indefinitely, combining debt and equity characteristics as investors receive regular income but never principal repayment. Issuers include banks (for AT1 capital), corporations, and governments – the UK’s consols dating from 1751 were recently redeemed. Modern perpetuals typically include call options after 5-10 years, with step-up coupons incentivizing redemption. For example, Deutsche Bank’s perpetual AT1 bonds pay 6% until first call date, then reset to higher spreads if not called. Valuation uses perpetuity formulas: Price = Annual Coupon / Required Yield, making them extremely sensitive to rate changes. A 100bp yield increase causes approximately 15-20% price decline for typical perpetuals versus 7% for 10-year bonds. Key risks include extension risk if not called, subordination in bankruptcy, and potential coupon deferral. The $500+ billion market offers yield pickup (typically 150-300bp over dated bonds) compensating for additional risks. Perpetual bonds serve specific needs: regulatory capital for banks, quasi-equity for corporations, and yield enhancement for investors.