Perpetual Bond http://www.investopedia.com/terms/p/perpetualbond.

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Filed Under: Bonds, Financial Theory, Fixed Income

Definition of 'Perpetual Bond'

A bond with no maturity date. Perpetual bonds are not redeemable but
pay a steady stream of interest forever. 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). Some in the U.S. believe it would be more efficient for the
government to issue perpetual bonds, which may help it avoid the
refinancing costs associated with bond issues that have maturity dates.

A perpetual bond is also known as a 'consol'.

Investopedia explains 'Perpetual Bond'

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.

Risks for Investors http://www.investopedia.com/articles/investing/082313/perpetual-bonds-overview.asp

A variety of risks are associated with perpetual bonds. Perhaps the most notable is that a
perpetual period is a long time to carry on credit risk. As time passes, bond issuers, including
both governments and corporations, can get into financial trouble and even fail.

Perpetual bonds may also be subject to call risk, which means that the issuer can recall them.
Another significant risk associated with time is that general interest rates may rise as the years
pass. If rates rise significantly, the interest rate paid by a perpetual bond may be much lower than
the prevailing interest rate, meaning investors could earn more money by holding a different
bond. In such a scenario, the perpetual bond would need to be sold on the open market, at which
time it may be worth less than the purchase price as investors discount their offers based on the
interest rate differential.

Determining the Value

Investors can figure out how much they will earn (the bonds yield if held until maturity) by
performing a relatively simple calculation. The formula and an example are provided below:

Annual Dollar Interest Paid

Current Yield = x 100%
Market Price

A bond with a $100 par value, trading at the discounted price of $95.92 and paying a coupon rate
of 5%, would have a current yield of 5.21%.

(0.05 x $100)
x 100% = 5.21%
$95.92

Since perpetual bonds have no maturity date, the payments (in theory) will continue forever.

Since money loses value over time (inflation plays a role here), the interest rate payments made
by a perpetual bond have less value to investors as time passes. The price of a perpetual bond is
therefore the fixed interest payment, or coupon amount, divided by the discount rate, with the
discount rate representing the speed at which money loses value over time. For perpetual bonds
that offer a growing perpetuity, yet another mathematical formula can be employed to determine
its value.

If all of this math is making your head spin, dont fret. In the age of modern technology, there is a
much faster way to get this information. Rather than make manual calculations with pen and
paper, just log on to the internet and search for yield on a perpetual bond calculator". Type in
some information, including the bonds price and the number of annual interest payments it will
make, and the calculator will automatically determine that bonds interest rate. Its the fast and
easy way to do the math.