Perpetual bond

A perpetual bond is a bond with no maturity date, paying its coupon indefinitely rather than ever repaying the original principal. Since there is no repayment date to count on, a perpetual bond's entire value comes from the stream of coupon payments it is expected to generate forever, which can be valued using a perpetuity formula that divides the annual coupon by an appropriate discount rate.

Perpetual bonds are far less common than ordinary bonds, and the ones that do exist in modern markets are mostly issued by banks and other financial institutions as a way to raise capital that regulators treat more like equity than debt, since it never has to be repaid. Many perpetual bonds include a call feature that lets the issuer redeem them after a set number of years, which in practice means investors often price and think about them as if they had an effective maturity at the first likely call date, even though the bond has no legal maturity date at all.

Because their price is extremely sensitive to changes in interest rates, given that all their value comes from cash flows extending indefinitely into the future, perpetual bonds carry high interest rate risk and correspondingly high duration. Investors considering a perpetual bond need to pay close attention to both the issuer's long-term credit risk and the terms of any call provisions, since both factors matter more here than they would for a bond with a fixed, foreseeable repayment date.