Explain Perpetual Bonds versus Fixed-term Bonds

Perpetual bonds are knows as perpetuities, consols, treasury annuities and undated treasuries. They have an English genesis and they contrast to fixed-term bonds. A perpetual bond is a bond that has no maturity date. The rate (coupon) payable on the bond may be floating or fixed, and the rate is paid in perpetuity. An example of a fixed-rate perpetual bond is depicted in Figure.


Figure: example of a perpetual bond (nominal value = LCCI 000 000; coupon = 10% pa)

In this example the perpetual bonds has a nominal value of LCCI million and an interest rate (coupon) of 10% per annum, payable 6-monthly in arrears. The nominal value is the amount payable for the bond at issue and this amount is not repayable. The LCC50 000 coupon (LCCI 000 000 x 0.10 / 2) is paid every 6 months from issue date ad infinitum (i.e. forever).

It will be evident that investors will only invest in these bonds if they are issued by an institution that has the ultimate creditworthiness. Only certain governments can claim this status. These bonds obviously still exist, but they are not issued any longer.