Glossario
Perpetual bonds
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Tipi di obbligazioni
Perpetual bond ("perpetual", or "undated") it’s a type of bonds, a distinctive feature of which is the absence of a specific maturity date.
Distinctive features of perpetual bonds:
1. Higher interest rate compared to bonds with a fixed maturity. Often after a certain period, the rate will be refixed to bring the market value of the bond back to its original value.
2. Availability of options, which gives the issuer the right to redeem the bonds on a predetermined date. Basically, the first call option coincides with the first date of the coupon refixing, the rest options will be called on the subsequent dates of the coupon payment.
3. Debt subordination. Often perpetual bonds are subordinated, so, if the issuer bankrupts, the claims of holders of subordinated bonds will be satisfied in the penultimate order (before shares).
Advantages for issuers:
- after the transition of the banking sector to Basel III standards, banks often issue this type of instrument to ensure the required level of equity capital;
- the availability of options allows the issuer, in the event of changes in market conditions, to redeem the issue and refinance it on more attractive debt terms;
- in the long term the issuer reduces operating costs for new issues or refinancing.
Advantages for investors:
- regularly paid higher interest compared to bonds with a fixed maturity;
- this tool is suitable for long-term investment as there is no need to resolve the issue of reinvesting funds.
However, this type of investment is associated with higher risks, such as the risk of inflation and the risk of early repayment.
In 1753, the Bank of England first issued perpetual bonds (consoles, from the English "consolidated annuities"), which can rightfully be called "eternal", since they are tradable nowadays. Since the 18th century to the first half of the 19th century consoles have played the most significant role in the UK government debt. The government used them to finance participation in military conflicts such as the American War of Independence and the Napoleonic Wars.
Distinctive features of perpetual bonds:
1. Higher interest rate compared to bonds with a fixed maturity. Often after a certain period, the rate will be refixed to bring the market value of the bond back to its original value.
2. Availability of options, which gives the issuer the right to redeem the bonds on a predetermined date. Basically, the first call option coincides with the first date of the coupon refixing, the rest options will be called on the subsequent dates of the coupon payment.
3. Debt subordination. Often perpetual bonds are subordinated, so, if the issuer bankrupts, the claims of holders of subordinated bonds will be satisfied in the penultimate order (before shares).
Advantages for issuers:
- after the transition of the banking sector to Basel III standards, banks often issue this type of instrument to ensure the required level of equity capital;
- the availability of options allows the issuer, in the event of changes in market conditions, to redeem the issue and refinance it on more attractive debt terms;
- in the long term the issuer reduces operating costs for new issues or refinancing.
Advantages for investors:
- regularly paid higher interest compared to bonds with a fixed maturity;
- this tool is suitable for long-term investment as there is no need to resolve the issue of reinvesting funds.
However, this type of investment is associated with higher risks, such as the risk of inflation and the risk of early repayment.
In 1753, the Bank of England first issued perpetual bonds (consoles, from the English "consolidated annuities"), which can rightfully be called "eternal", since they are tradable nowadays. Since the 18th century to the first half of the 19th century consoles have played the most significant role in the UK government debt. The government used them to finance participation in military conflicts such as the American War of Independence and the Napoleonic Wars.
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