Perpetual bonds are a type of debt security without a fixed maturity date. In the low interest rate environment after the 2007-2008 financial crisis, there has been a resurgence in these bonds, which could end up paying interest to investors forever, or at least a very long time. The most attractive feature of a perpetual bond is a higher fixed interest rate payment. However, there are enough downside concerns to prompt you to think twice before directing your broker to find you some of these bonds.
Fixed Rate - No Maturity Date
Bonds are debt securities issued by both government entities and corporations. The typical bond pays a fixed rate of interest for a period of years and then pays off the face value of the bond to the investor on the stated maturity date. With a perpetual bond, there is no fixed maturity date and the issuer is on the hook to potentially pay the interest forever. A perpetual bond will have a fixed interest payment, referred to as the coupon rate. To compensate for the lack of a maturity date, perpetual bonds typically pay a significantly higher interest rate than comparable conventional bonds.
Call Feature Included
Most perpetual bonds come with a bailout clause for the issuer referred to as a call provision. This feature allows the bond to be called in or paid off after a certain period of time. Perpetual bonds sold in recent history have call dates 5 to 13 years after the issue date. Call dates give the issuer of a perpetual bond a way out of paying interest forever. The call provision may allow the bond to be called only on certain dates or permanently open the call potential up at the first call date. A company is likely to call a bond when new bonds can be issued at lower interest rates.
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Perpetual bonds issues in the years after the financial crisis have come primarily from European and Asian companies. Bonds from both regions have been denominated in dollars, euros or British pounds. The Asian perpetual bonds are mostly U.S. dollar bonds. In the United States GE Capital has issued perpetual bonds and Mexican telecom provider American Movil has sold perpetual bonds in three different currencies. As long as long-term interest rates stay low, the market may see more perpetual bond issuance to satisfy the investor hunger for higher yields.
Preferred Stock Alternative
For U.S. investors there is an easier way to get a fixed, perpetual income stream. Preferred stock shares that pay a fixed dividend -- most do -- will provide the steady stream of income with no maturity date. While preferred stock is junior to bonds in the event of a bankruptcy, the preferred shares of a major U.S. corporation are probably not more risky than a perpetual bond from a Chinese or Indian company. Also, preferred stock dividends may be taxed at the lower qualified dividend rate while bond interest is taxed at your regular income tax rate.
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