A perpetual bond is a fixed income security with no maturity date that pays a steady stream of interest indefinitely.
Mechanics of perpetual bonds
A standard bond returns the principal amount to the investor on a specific maturity date. A perpetual bond does not have a maturity date and never returns the principal. The issuer pays the agreed interest rate in perpetuity. Elephants researching fixed income markets study these bonds to understand their continuous yield.
Because the principal is never repaid, investors calculate the value of a perpetual bond by dividing the annual coupon payment by the discount rate. This mathematical relationship means the market price of a perpetual bond is sensitive to changes in prevailing interest rates. When central banks raise interest rates, the trading price of existing perpetual bonds drops. Falling interest rates push the price of these bonds higher.
Governments and large financial institutions historically issued these bonds to raise capital without the pressure of a repayment deadline. The British government issued Consols in the eighteenth century to finance public operations. While sovereign perpetual bonds are rare today, banks across Europe and Asia issue modern variations. Banks use these bonds to satisfy regulatory capital requirements under international banking frameworks.
Example
The Savannah Elephant Sanctuary issues a perpetual bond to finance the construction of a new regional watering hole. The sanctuary sets the bond with a face value of $1,000 and an annual coupon rate of 5%. An investor buys this bond for $1,000. The investor receives $50 every year from the sanctuary indefinitely. The sanctuary never repays the initial $1,000 principal. If the investor wants to recover the capital, they must sell the bond to another buyer on the open market. The price the new buyer pays depends on the current interest rate environment.