Perpetual Bond

Definition

A perpetual bond (also called a consol or “perp”) is a fixed‑income security with no maturity date. It pays a fixed coupon indefinitely and does not repay principal. Because payments continue forever, perpetual bonds are often treated similarly to equity instruments rather than traditional debt.

Key features

• No maturity date — principal is never redeemed.
• Permanent coupon payments — interest is paid indefinitely.
• Price sensitivity — value depends entirely on the assumed discount rate.
• Rare in practice — few issuers are creditworthy enough for investors to accept no principal repayment.
• Historical examples — issued by governments such as the British Treasury (including older consols); also notable in early financial history (e.g., the South Sea era).

Valuation

The present value (price) of a perpetual bond is the present value of an infinite stream of identical coupon payments. The standard formula is:

Present value = D / r

Where:
* D = periodic coupon payment (cash flow per period)
* r = discount rate (required rate of return)

Example: a perpetual bond that pays $10,000 per year with a 4% discount rate:
Present value = $10,000 / 0.04 = $250,000

Sensitivity examples:
* r = 3% → PV = $10,000 / 0.03 = $333,333
* r = 4% → PV = $250,000
* r = 5% → PV = $200,000
* r = 6% → PV = $166,667

A small change in r produces a large change in price because payments continue indefinitely.

Uses and risks

• Uses: Perpetual bonds can be attractive to investors seeking steady income and issuers wanting to avoid refinancing deadlines. They behave similarly to preferred stock or dividend‑paying equities.
• Risks: Interest‑rate risk is substantial (price falls as rates rise). Credit risk matters because there is no principal repayment. Inflation erodes the real value of fixed coupons over time.

Bottom line

Perpetual bonds provide indefinite coupon income and can be valued simply as D/r. Their attractiveness depends on issuer creditworthiness and interest‑rate expectations; the valuation is highly sensitive to the discount rate, so investors must weigh income stability against interest‑rate, inflation, and credit risks.