A perpetual bond is a type of bond which is open-ended and does not have a fixed bond term.
Interest is paid out to bond holders at regular intervals, but the bond itself only matures if and when its issuer goes bankrupt.
Issuers of perpetual bonds are not obligated to repay the bond principal to lenders (investors). The investors hold the bonds and earn interest on their face value indefinitely.
Because bond principal is not repaid, issuers typically pay out higher interest rates on perpetual bonds than on regular bonds. The higher interest earned compensates for the withholding of the bond principal.
The bond principal is only repaid if the issuing company or government entity goes bankrupt. In the event of bankruptcy, investors can claim repayment of their bond principal in keeping with laws and regulations governing debt repayment priority.
The principal of perpetual bonds issued in Switzerland is typically categorized as subordinated debt and is only repaid after the borrower’s other debts have been settled.
Perpetual bonds are long-term investment vehicles. Only once interest paid in the form of coupons has covered the cost of buying the bonds does the investor begin to earn yields.
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