Investing in a bond means that you are lending money to the bond issuer. In return for your loan, the issuer pays you regular interest on your investment. At the time of maturity, the issuer also pays back your principal investment.
The fixed rate at which you earn interest on a bond is called its coupon rate. Bond coupon refers to this interest received periodically. Yield is the overall rate of return on the bond, and indicates the profitability of your investment.
A perpetual bond is a type of irredeemable bond with no expiration date. It provides investors with a fixed bond coupon for perpetuity. Here are the features and benefits of investing in perpetual bonds in India.
A perpetual bond is a fixed-income debt instrument, issued by entities that want to raise capital without the obligation of paying it back. It is not redeemable, nor does it have a maturity date. This means that there is no end date wherein you get back the principal investment. Nor can you withdraw the invested amount at any given time.
While you forgo the right to redeem your principal, you gain the right to receive fixed interest payments forever. Perpetual bonds are hence suitable for retirees who want to guarantee a steady source of income for the rest of their lives.
One way to sell your perpetual funds is through the secondary market. Another way of redeeming] perpetual bonds is when the issuer calls back the bonds.
Call option dates are usually set every 5-10 years, and you can sell back the bonds to the issuer when they exercise this option. This way, you can get back the principal that you invested.
In India, governments, banks and other large corporations are eligible to issue these bonds, also known as ‘perps’ or ‘consol bonds’. Individuals, banks, corporates or mutual funds can buy perpetual bonds. There are a few key features associated with such bonds, namely:
Perpetual bonds carry a constant credit risk. Additionally, in the event of liquidation of the issuer, you can claim funds only after all other bondholders. This is second only to equity shareholders.
Since they are closer to equity in terms of credit risk, perpetual bond interest rates are higher. You can get an interest of 8% and above on such bonds.
There are many unique benefits to investing in perpetual bonds. Some of these perks are as follows.
A fixed coupon rate is predetermined when you buy perpetual bonds. Until the issuer exercises the call option, you can enjoy regular funds for a lifetime.
Since these bonds carry a certain level of credit risk, they are offered at high interest rates. This allows for higher yields on your investment, provided you buy them at adequate prices.
The issuer's creditworthiness is crucial when investing in perpetual bonds. If the issuer faces financial difficulties or defaults on interest payments, investors may suffer losses.
The interest rate on perpetual bonds is typically fixed, but if prevailing interest rates in the market rise significantly, the fixed interest payments from the bond may become less attractive compared to other investments.
Perpetual bonds may have limited liquidity in the secondary market. It can be challenging to find buyers or sellers, potentially leading to unfavorable prices when trading.
You should invest in perpetual bonds with high coupon rates to ensure good returns. Also, shortlist issuers having the capacity to make regular interest payments. Since the goal is to ensure consistent inflow, you must pick bonds offered by companies with a proven track record.
While ups and downs in the market are common, companies that are worth investing in will stand out from the rest. Also, you can always reach out to a professional wealth planner or investment advisor to know which bonds can best suit your needs.
Overall, perpetual bonds are a high yielding, fixed-income source. This is why such bonds are preferred over equity during high inflation. If you are considering investing in perpetual bonds, check out options on Bajaj Markets.
As with all investments, it is important to do due diligence before buying perpetual bonds. Make sure you understand the risk and reward trade-off before investing.
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Perpetual bonds are considered to be riskier than regular finite bonds. They are redeemable only if the issuer exercises the call option. Also, during liquidation, these bondholders are paid only before equity holders.
The yield is calculated as: (Periodic Coupon Payment/Market Price of the Bond) * 100
To meet immediate need for funds you can sell your perpetual bonds in the secondary market. Or else, you can wait for a call back from the issuer.
Yes. If interest rates go higher than the bond coupon rate, investors lose value on their investment. Likewise, if interest rates steadily decline, issuers usually exercise the call option, putting an end to the unlimited interest payments.