Perpetual bonds: difference from other types of securities
Perpetual, they are also consol bonds, which have no definite term to maturity. This means that the investor cannot get a refund from the issuer. However, he has the opportunity to sell such bonds at the stock exchange or receive fixed income from them for a long time.
It should be understood that the term “perpetual bonds” is not interpreted literally. The issuer at the time of the transaction can denote the period after which it is possible to repurchase the bonds through a call option, usually up to 10 years.
The main advantage of perpetual bonds is a fixed rate of return, which, compared to conventional bonds, has a rather large indicator. This type of securities is also called rent. However, it should be understood that the level of income from perpetual bonds depends on interest rates, which are accepted in the country. As the latter increase, the yield from the securities decreases, and they become cheaper at the exchange. In turn, when interest rates are reduced, consol bonds become more profitable.
For example, an investor has bought such securities with a fixed rate of income at 7% per annum, when the key rate was 5%. Over time, the latter rose to 8% per annum. Accordingly, the cost of credit has also increased, and the attractiveness of bank deposits increased. At the same time, the demand for perpetual bonds has decreased, and their yield is almost the same as the inflation rate in the country. This point refers to the risks of investing in securities.
When buying perpetual bonds, the investor receives a coupon income exceeding the market average. This factor is a profitable advantage for those who want to invest for a long term. At the same time, one should not be afraid of low liquidity.
In addition, perpetual bonds are also suitable for short-term investments if you work with them during a crisis, when the currency is depreciating and credit rates are increasing. In such a period, you can buy securities at a low price and then sell them at a higher price after economic recovery.
For the first time, perpetual bonds appeared in the UK in 1753, they were issued by the Bank of England, and they are still represented on the exchange in London at a coupon rate of 2.5 per annum. In 1923, Parliament issued a decree that the bonds can be redeemed at any time when the government deems it necessary.
Another popular perpetual bond is the Coca-Cola Corporation, which was issued in 1993. Their maturity date is 2093. The amount of income is 7.3 percent.