# Perpetual Bonds Explained: Definition, Calculation Formula, and Examples

![Perpetual Bond: A fixed income security with no maturity date.](https://www.investopedia.com/thmb/o_3KZyHhcZNsGqBHQh8uSm39BIA=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/perpetualbond.asp-final-581131fc7d6842b48e2b7a201ced86c0.png)

*— Investopedia / Zoe Hansen*

> **Definition**
>
> A perpetual bond, also known as a "consol bond" or "perp," is a fixed-income security with no maturity date. It's often considered an equity, not a debt.

## What Is a Perpetual Bond?

A perpetual bond, also known as a "consol bond" or "perp," is a fixed income security with no maturity date, meaning the principal is never repaid. While not redeemable, these bonds offer consistent interest payments indefinitely, often positioning them as equity rather than debt. They occupy a specific niche in the bond market, historically issued by entities like the British Treasury.

### Key Takeaways

*   Perpetual bonds, also known as "consol bonds" or "perps," are fixed income securities with no maturity date that pay interest indefinitely.
*   These bonds resemble equity due to their indefinite interest payments but carry the risk of having no principal repayment.
*   The price of a perpetual bond is calculated by dividing the coupon payment by the discount rate, reflecting the time value of money.
*   Historical examples of perpetual bonds include those issued by the British Treasury around World War I.
*   The present value of a perpetual bond is sensitive to changes in the discount rate, impacting its finite valuation.

## Delving Deeper Into Perpetual Bonds

Perpetual bonds are rare in the [bond market](https://www.investopedia.com/terms/b/bondmarket.asp) because few entities are safe enough for investors to trust in a bond where the principal is never repaid.

Notable perpetual bonds include those by the British Treasury for World War I and the South Sea Bubble of 1720. Some in the U.S. believe the federal government should issue perpetual bonds, which may help it avoid the refinancing costs associated with bond issues that have maturity dates.

## Calculating Perpetual Bond Value

Perpetual bond payments are like stock dividends since both offer returns indefinitely. Thus, they are priced similarly.

The [price of a perpetual bond](https://www.investopedia.com/articles/investing/082313/perpetual-bonds-overview.asp) is its fixed interest payment divided by a constant discount rate, reflecting money's decreasing value over time due to inflation. The [discount rate](https://www.investopedia.com/terms/d/discountrate.asp) denominator reduces the real value of the nominally fixed coupon amounts over time, eventually making this value equal zero. As such, perpetual bonds, even though they have [no maturity date and pay interest forever](https://www.investopedia.com/terms/p/permanent-loan.asp), can be assigned a finite value, which in turn represents their price.

## Calculating Present Value: The Perpetual Bond Formula

Present value = D / r

Where:

D = periodic coupon payment of the bond

r = discount rate applied to the bond

For example, if a perpetual bond pays $10,000 per year in perpetuity and the discount rate is assumed to be 4%, the present value would be:

Present value = $10,000 / 0.04 = $250,000

Note that the present value of a perpetual bond is highly sensitive to the discount rate assumed since the payment is known as fact. For example, using the above example with 3%, 4%, 5% and 6% discount rates, the present values are:

Present value (3%) = $10,000 / 0.03 = $333,333

Present value (4%) = $10,000 / 0.04 = $250,000

Present value (5%) = $10,000 / 0.05 = $200,000

Present value (6%) = $10,000 / 0.06 = $166,667

## The Bottom Line

Perpetual bonds, often considered a type of equity, offer a unique investment option due to their indefinite payment period. Despite their non-redeemable nature and the principal never being returned, they provide consistent interest payments, similar to stock dividends. The present value of these bonds can be easily calculated using the formula D/r, where D represents the periodic coupon payment and r the discount rate.

This valuation underscores the sensitivity of perpetual bonds to changes in the discount rate, making it essential for investors to carefully consider market conditions and inflation impacts. Historically, governments like the British Treasury have issued perpetual bonds, but they remain a niche within the bond market due to their inherent risks.

> **Article Sources**
>
> 1.  UK.gov. "[Perpetual bonds - An Investment For Life](https://actuaries.blog.gov.uk/2020/09/04/perpetual-bonds-an-investment-for-life/)."