October 31, 2025
4 mins read
A perpetual bond is a financial instrument that is, essentially, an investor loan to a bank, company, or government. A perpetual bond is different than a regular bond because it does not have a maturity date (the date when the principal is repaid).
Once the investor buys the perpetual bond, they receive interest payments for as long as the bond exists. Since it has no maturity date, the payments could continue indefinitely.
For instance, if you buy a perpetual bond at ₹1,000 with 7% interest, you will receive ₹70 (so long as no premium or discount applies) each year. You will receive ₹70 as interest each consecutive year until the issuer stops paying interest. However, at no time will you receive the ₹1,000 back.
This is why it is acceptable to make analogies between a perpetual bond and shares. Like shares, their payments are perpetual; they do not have a maturity date. However, there is a significant distinction. Companies are not legally obliged to pay dividends on shares while, on the contrary, issuer has an obligation to pay, though not a duty, interest (as long as the issuer is solvent).
When you buy a normal bond, you know exactly when you will receive your principal back, along with interest during the bond’s life. In a perpetual bond, this is not the case. You only keep receiving interest.
These interest payments can even continue after the investor passes away. In that situation, the legal heirs of the investor are entitled to the income. This makes perpetual bonds unique because they can last across generations.
One notable example of a perpetual bond is HSBC Holdings’ issuance of Additional Tier 1 (AT1) bonds. These bonds are designed to strengthen the bank’s capital reserves as per Basel III norms.
They pay a high coupon to investors but come with provisions such as interest deferral and principal write-down under stress. Similar perpetual instruments have also been issued by financial institutions like Barclays and Deutsche Bank, offering long-term capital without fixed maturity.
In India, the State Bank of India (SBI) issued ₹5,000 crore worth of AT1 bonds in January 2024, offering a coupon rate of 8.34%. These perpetual bonds come with a call option after 10 years and are designed to bolster the bank's core capital base.
The issuance received strong investor interest, reflecting confidence in SBI's financial stability. Such instruments are crucial for banks to meet regulatory capital requirements while providing investors with higher yields, albeit with increased risk.
Perpetual bonds have a few main characteristics that help them to be different than other bonds:
Unlimited coupon payments– You will receive interest payments as long as the issuer is solvent.
No principal repayment– You will not receive your investment back (unless the issuer calls in the bond).
No maturity date– There is no end date, therefore “yield to maturity” does not apply.
Callable option– Perpetual bonds have a call option for the issuer after a set time.
Theoretically, yes. Since there is no maturity date, coupon payments will go on forever. However, in reality, things are a little more complex.
Banks, for example, may skip or defer interest payments if they face financial losses. Certain perpetual bonds, particularly Additional Tier 1 (AT1) bonds, provide issuers with the option to suspend payments in times of stress. The more extreme scenario is when the bonds can be written off entirely and it's bye-bye money for investors.
In this respect, there's nothing inherently wrong with perpetual bonds. There's a promise for income for an indefinite period of time ahead, but it comes down to the financial health of the issuer which is crucial. This pretty much means that it is very important for investors to check out who is actually issuing the bond.
Perpetual bonds are primarily issued by large financial institutions, including banks, corporations, and governments. These entities leverage perpetual debt as a means to raise capital without the obligation to repay the principal amount.
For banks, perpetual bonds play a crucial role in enhancing their capital base, classified under Tier 1 capital. This allows them to meet regulatory requirements while maintaining a stable financial footing.
Corporations also issue perpetual bonds to fund significant projects or refinance existing debt. The appeal of these bonds lies in the higher yields they offer compared to traditional bonds with fixed maturities.
Investors are often attracted to the steady income from coupon payments, aligning well with their financial objectives. Understanding what is perpetual bond in this context helps investors evaluate the risks and rewards associated with these instruments.
There are many reasons why investors buy perpetual bonds:
Perpetual bonds pay interest periodically just like a bond with a maturity date. This is useful for some people investing for income such as retirees.
Perpetual bonds typically pay a higher interest than regular government or corporate bonds.
A perpetual bond can give your investment portfolio more diversity, and balance your stocks and other fixed income products.
A family believes perpetual bonds can provide ongoing income for their family, and even the next generation.
Investing in perpetual bonds includes many risks, even with the benefits to retirement income:
An issuer could go bankrupt and if they do, it is possible (if they are no public tradeable bonds) your interest payments can stop. Further, because this is a perpetual bond, if the principal is never returned your loss can be permanent.
The coupon rate on a perpetual bond is fixed. When inflation rises to a rate above the bonds interest rate, consumer prices will eat into the real return of the bond, yielding lower purchasing power.
If the issuer makes a call option bond a primary trait, the issuer could call the bond early, and you would forgo future payments you would expect from the implied contract.
Due to these risks, perpetual bonds are not considered to be appropriate for all investors.
The price of a perpetual bond can be worked out using a very simple formula:
Price = Annual Interest ÷ Discount Rate
For example, if a bond pays ₹1,000 each year and the discount rate (often linked to inflation) is 5%, then:
Price = 1,000 ÷ 0.05 = ₹20,000
This means the value of the bond in the market will be ₹20,000.
Consistent source of income – Investors can count on regular interest payments, which provide predictability in their income.
Higher returns than traditional bonds – The interest rate is generally higher than government bonds or deposits.
Long-term benefits for generations to come – The income continues from generation to generation, which can be valuable for families with long-term plans.
No return of capital – Investors will never get back their original investment.
Credit risk is high – Payments cease if the issuer goes bankrupt.
Uncertainty arising from call options – The issuer has the right to redeem the bonds sooner than expected, thereby impact the anticipated investment income.
Exposure to inflation – Fixed interest doesn’t rise to offset price increases due to inflation.
Perpetual bonds are unique tools. They provide recurring interest income for life or as long as you own the bond, but never return the principal (or you may limited the risks yourself by owning perpetual bonds with call options).
On one hand, perpetual bonds can be enticing to investors wanting consistent income. On the other hand, investors run risks that include credit risk, inflation risk, and no return of principal ambiguity due to call option risks.
Simply put, with a perpetual bond, you are exchanging the return of your money for recurring interest income. Thus, perpetual bonds should be chosen with care after evaluating your own risk appetites and other financial and investment goals.
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Bonds which do not have a term of maturity, which means their issuer does not have to pay their principal back and instead has to pay interest forever are called perpetual bonds. Meanwhile, regular bonds have a date of maturity, which means their issuer has to pay the principal to their investors on that date.
The interest on perpetual bonds is paid forever. Usually, it’s paid once in a year (annual basis) or twice in a year (semi-annual basis).
There are two main advantages of investing in such bonds. One, perpetual bonds offer a steady stream of interest income. Two, typically, they offer a higher interest rate than other bonds.
If the issuer of a perpetual bond goes insolvent, he will not be able to pay the interest due on them. If the inflation increases to such an extent that it's higher than the interest payable on a perpetual bond, then the investors of such bonds will earn a negative return after considering the inflation.
Only those investors who want to earn a steady interest income for an extremely long period of time should think of investing in perpetual bonds. This is because such bonds do not pay back the principal to investors in most cases, while they pay interest forever.
Perpetual bond ratings significantly influence investment potential. Higher ratings indicate lower credit risk, attracting investors seeking stable income. Conversely, lower ratings can diminish confidence and demand, affecting the bond's market value. Understanding these ratings is essential for evaluating perpetual debt investments.
Typically, perpetual bonds cannot be converted into equity. They are designed as fixed-income securities that provide continuous interest payments without maturity. While some hybrid instruments may allow conversions, standard perpetual bonds focus solely on generating income rather than equity benefits.
Banks, large corporations, and governments frequently issue perpetual debt instruments. Banks utilize them to enhance Tier 1 capital, while corporations issue these bonds to fund projects or refinance debt. In India, governments may also issue perpetual bonds for infrastructure financing.
In India, perpetual bonds are regulated by the Reserve Bank of India (RBI). Guidelines ensure issuers maintain adequate capital and transparency. Specific rules govern banks' issuance of perpetual debt instruments, balancing risk and financial stability for investors in the market.
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