Perpetual Bonds, which are also known as the name of Consol, are the bonds which have no maturity period and keep on paying interest to the investors regularly. The issuer of Perpetual Bonds is not required to redeem these bonds. They are generally treated as equity and not as loan / debt. The Perpetual Bonds were probably first used by British Treasury during Napoleon War in 1814. Even these days, the UK government issues Perpetual Bonds known as Consol in that country.
These days, banks issue Perpetual Bonds in the form of subordinate bonds to meet their requirement of capital. Generally the issuer of the Perpetual Bonds can call such bonds i.e. they can take back the bonds in return of some benefits though they cannot call the bonds before the completion of five years from the date the bonds were issued.
Like other bonds, Perpetual Bonds can also be sold in the secondary market. The Perpetual Bond holders have to transfer the bond certificates in the name of the new buyer or investor. Perpetual Bonds are relatively stable as a form of investment when compared to other bonds since Perpetual Bonds have no maturity period and the interest is paid to the owner till the bond is active.
However, Perpetual Bonds is not for those investors who are ready to take risk in the hope of getting huge returns since Perpetual Bonds do not provide huge profits.
Many financial analysts believe that the governments the world over should issue Perpetual Bonds rather than other bonds as through Perpetual Bonds, they will not only be able to raise capital for its programs, infrastructure projects etc but also provide flexibility to the issuer to call the bond if the situation demands. Also, they do not have to worry about repaying the principal amount at the time of maturity like other bonds.
The price of Perpetual Bonds is derived by dividing the interest payment to the investors by the discount rate, which takes into account the inflation.
PV = I/K
Where, PV stands for Perpetual Bonds, I stands for the interest paid to the owner and K represents the discount rates.
As time passes, the value of fixed interest or coupon declines majorly because of inflation.
Conclusively, Perpetual Bonds is for those investors who do not want to take any risks with their money and are happy receiving regular income in the form of interest till the bonds are active.