Definition of Perpetual Bond
What is a Perpetual Bond
A perpetual bond is a bond that will pay interest over the life of the bond and since a perpetual bond has no maturity date, the interest will continue to be paid forever or in perpetuity. Perpetual bonds are also known as perps or perpetuities.
History of Perpetual Bonds
The oldest known perpetual bond, which still pays interest, was issued in 1648 by a Dutch company. Stichtse Rijnlanden, a Dutch water board issued the bond to finance improvements to a local dike system. Originally issued to Niclaes de Meijer, the bond is currently owned by Yale.
The emergence and issuance of perpetual bonds was widely credited to the British government in the 18th century. In 1751, UK consols or consolidated annuities were first introduced at a 3.5% interest rate and they have been in circulation ever since, although the interest rates have varied. In 2015, the British government, under Section 124 of Finance Act 2015, decided to redeem all consols in circulation. The first US Government consols were issued in the 1870s.
How to Calculate the Current Yield of a Perpetual Bond
To calculate the current yield, you need to know the face value of the bond, the fixed-interest rate and the price paid for the bond. To calculate the annual interest payment, multiply the face value of the bond by the fixed-interest rate. Divide the annual interest payment by the price paid for the bond and then multiply times 100. This will give you the current yield on a perpetual bond.
For example, let's assume a perpetual bond has a face value of $100 and a fixed-interest rate of 3%. We will also assume the price of the bond is 96.75. Based upon this information, the annual interest payment is $3 ($100 x 3%) and the current yield is 3.1% (($3 / 96.75) x 100).
Effects of Interest Rate Changes on the Value of a Perpetual Bond
Since the interest rate of a perpetual bond is fixed, changes in interest rates will change the value of the perpetual bond. When interest rates go up, the value of a perpetual bond will go down and the current yield of the perpetual bond will go up, generally following the interest rate change, assuming no other changes in the bond credit quality.
Glossary of Terms and Phrases
A financial dictionary or glossary is an essential tool to better understand the meaning of a specialized term or phrase. It would obviously make life much easier if everyone spoke the same language and used the same financial terms and phrases but that is not realistic.
We learn new languages to communicate with each other, transact business globally and to appreciate other cultures. Global finance is a specialized language that if understood and mastered, it will provide benefits that help to decrease risk and improve investment returns. Financial literacy is the foundation of developing good investment strategies and sound decision making.