FinTech Glossary

Meaning

A perpetual bond is a debt instrument that does not have a fixed maturity date. The issuer is not required to repay the principal on a scheduled maturity date, but it generally pays periodic interest or coupon payments to investors for as long as the bond remains outstanding.

Because there is no maturity date, perpetual bonds behave differently from regular bonds. Investors mainly rely on coupon income, market liquidity, issuer credit quality and any call option that allows the issuer to redeem the bond at a future date.

In simple terms, a perpetual bond can continue indefinitely unless the issuer redeems it according to the terms of issue.

Business Context

Perpetual bonds are often used by banks and financial institutions as part of capital-raising structures, especially in the form of Additional Tier 1 or similar instruments. Companies may also use perpetual debt-like instruments where allowed under applicable regulations.

For issuers, perpetual bonds can strengthen capital without creating a fixed repayment date. For investors, they may offer higher yields than ordinary debt because they carry additional risk.

Important risks include:

• No fixed principal repayment date

• Coupon payments may be discretionary in some structures

• Market price can fall sharply if interest rates rise or issuer risk increases

• Some bank capital instruments can absorb losses under regulatory conditions

This is why perpetual bonds should not be treated like fixed deposits or ordinary secured bonds.

How It Works

A perpetual bond usually has a face value, coupon rate, payment frequency and call provisions. Although there is no maturity date, the issuer may have the option to call or redeem the bond after a specified period, subject to terms and regulatory permissions where applicable.

Example:

• Face value: ₹1,000

• Coupon: 8 percent per year

• Maturity: No fixed maturity

• Call option: Issuer may redeem after a defined period if conditions are met

If the issuer does not call the bond, the investor may continue receiving coupons, but the principal may remain outstanding indefinitely. The investor can usually exit only by selling in the secondary market, subject to liquidity and market price.

Why It Matters for Businesses and Investors

Perpetual bonds matter because they blur the line between debt and equity-like risk. They may be classified as debt securities, but the absence of maturity and special loss-absorption or coupon features can make them significantly riskier than plain vanilla bonds.

For issuers, they can help manage capital structure and regulatory capital requirements. For investors and treasury teams, they require careful due diligence.

Before investing, review:

• Issuer credit rating and financial strength

• Coupon deferral or cancellation terms

• Call option conditions

• Listing and liquidity

• Tax treatment and valuation risk

• Whether the instrument has special features such as write-down or conversion

The higher yield is compensation for higher complexity and risk. It should be evaluated accordingly.