Perpetual Bonds are primarily issued by government entities and banks.
Banks issue these bonds in order to meet their Tier 1 Capital Requirement.
Although Perpetual bonds are considered a very safe Investment, they carry the credit risk of the issuer for an indefinite period of time.
Reliable fixed income stream.
Paying the higher interest as compared to regular bonds.
No need to engage in “reInvesting”.
Don’t require to inspect bond maturities.
The yield return is calculated by the Investors which they expect to realize from Investing in a perpetual bond are as described:
Current yield on a perpetual bond = (the total amount of coupon payments obtained annually/ market price of the bond)x100.
Suppose you have Invested in a perpetual bond at par value of Rs 1000 by buying the bond at a discount rate of Rs 950. You get a total of Rs 70 per year in coupon payments.
Current Yield =[70/950]X100=0.0736X100=7.36%
The current yield from the bond is 7.36%.
The perpetual bonds annual coupon will be summed up to the Investor’s total income and taxed according to the Income tax slab one gets in.
But if the bond gets sold off in the secondary market and the Investor makes long-term capital gain(after 1 year holding period), then the LTCG(long-term capital gains) tax will be applicable at 10% without indexation.
Banks issue AT1 bonds or Perpetual bonds to fulfill their capital adequacy requirement. The higher capital adequacy norms came into effect after the 2008 financial crisis with the bankruptcy of few banks and financial institutions.
Banks can skip paying principal or interest payments if the bank’s capital adequacy ratio slumps below a specific threshold. They require maintaining a capital adequacy ratio of 10.875% and a Capital Conservation Buffer of 1.875% to safeguard themselves from any systemic risk. Banks target to maintain their capital adequacy ratio above this regulatory limit.
Coming without any specified maturity, perpetual bonds can be redeemed by the issuers, generally after 5 to 10 years. The issuer may call or redeem the bonds if refinancing may be done by them for the issue at a cheaper rate, especially when interest rates are falling. They also have the provision to pay you the interest regularly or skip and extend the bond’s tenure.
State Bank of India
Bank of Baroda
Punjab National Bank
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