what is perpetual debt?
1 Answer(s)
Tina
Perpetual Debt are bonds with no maturity date. Perpetual bonds are not redeemable but pay a steady stream of interest forever.
It is not "straight debt", rather it is close to, or in some cases identical to, preferred shares, paying a fixed-rate coupon similar to preferred shares' fixed-rate dividend.
Perpetual debt comes in two types: cumulative and noncumulative. Interest on cumulative perpetual debt accrues if payments are missed. For noncumulative perpetual debt, if payments are missed, they do not accrue and the cash flow is lost.
Noncumulative perpetual debt is almost identical to typical preferred shares (most of which are noncumulative), the only difference being that preferred shares often have the option of conversion to common shares, while perpetual debt generally does not. Because noncumulative perpetual debt can be counted as Tier 2 capital (supplementary capital), it is generally issued by banks as a way to maintain capital requirements (i.e. capital adequacy ratio or CAR). The debt is generally callable by the issuer at some point.
Since perpetual bond payments are similar to stock dividend payments - as they both offer some sort of return for an indefinite period of time - it is logical that they would be priced the same way. The price of a perpetual bond is therefore the fixed interest payment, or coupon amount, divided by some constant discount rate, which represents the speed at which money loses value over time (partly because of inflation). The discount rate denominator reduces the real value of the nominally fixed coupon amounts over time, eventually making this value equal zero. As such, perpetual bonds, even though they pay interest forever, can be assigned a finite value, which in turn represents their price.
Some of the only notable perpetual bonds in existence are those that were issued by the British Treasury to pay off smaller issues used to finance the Napoleonic Wars (1814).
Dec 16 2013 11:18 PM
It is not "straight debt", rather it is close to, or in some cases identical to, preferred shares, paying a fixed-rate coupon similar to preferred shares' fixed-rate dividend.
Perpetual debt comes in two types: cumulative and noncumulative. Interest on cumulative perpetual debt accrues if payments are missed. For noncumulative perpetual debt, if payments are missed, they do not accrue and the cash flow is lost.
Noncumulative perpetual debt is almost identical to typical preferred shares (most of which are noncumulative), the only difference being that preferred shares often have the option of conversion to common shares, while perpetual debt generally does not. Because noncumulative perpetual debt can be counted as Tier 2 capital (supplementary capital), it is generally issued by banks as a way to maintain capital requirements (i.e. capital adequacy ratio or CAR). The debt is generally callable by the issuer at some point.
Since perpetual bond payments are similar to stock dividend payments - as they both offer some sort of return for an indefinite period of time - it is logical that they would be priced the same way. The price of a perpetual bond is therefore the fixed interest payment, or coupon amount, divided by some constant discount rate, which represents the speed at which money loses value over time (partly because of inflation). The discount rate denominator reduces the real value of the nominally fixed coupon amounts over time, eventually making this value equal zero. As such, perpetual bonds, even though they pay interest forever, can be assigned a finite value, which in turn represents their price.
Some of the only notable perpetual bonds in existence are those that were issued by the British Treasury to pay off smaller issues used to finance the Napoleonic Wars (1814).