Perpetual bonds: what are they, how do they work?
Financial products
Posted by MoneyController on 20.05.2024
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There is, at least in theory, a rather special type of bond, as it has no maturity date and distributes coupons virtually forever: these are perpetual bonds. But what are they and how do they work?
Perpetual bonds are bonds that do not have a maturity date. This means that, on the one hand, they distribute coupons virtually forever and, on the other hand, put the issuer in the position of never having to repay the borrowed money again.
As James Chen writes on the ‘Investopedia’ portal, these products in some ways resemble a stock that regularly pays dividends rather than a bond. In any case, Chen continues, these financial products may only occupy a very small niche in the market: there are few issuers judged to be so solid as to be able to pay interest on a debt security virtually indefinitely.
It may seem contradictory, but as we read on the page dedicated to the subject of the Italian Public Accounts Observatory of the University of the Sacro Cuore of Milan, there are no perpetual bonds in circulation today. Moreover, as Banco BPM points out - again on a page dedicated to this type of financial instrument - the issuance of perpetual bonds is almost always accompanied by termination clauses on the part of the issuer, who therefore often reserves the right (as has happened in the past) to take them off the market.
As we read again on the page dedicated to the subject of the Italian Public Accounts Observatory of the University of the Sacred Heart of Milan, there are at least three very concrete risks linked to perpetual bonds: 1) the risk of insolvency on the part of the issuer; 2) the unlimited duration may mean that, on the secondary market, the price of the risk is paid at the price of a higher yield demanded: in other words, this means a drop in the value of the bonds on the market; 3) the liquidity risk, since these are bonds that have no market today and would therefore be difficult to trade on the secondary market.
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