What Is a Perpetual Bond and How Does It Work?

Investors looking for steady income often turn to bonds, but most have a fixed maturity date. Perpetual bonds, however, have no expiration, meaning issuers never have to repay the principal as long as interest payments continue.

This type of bond offers regular interest payments but also carries risks that investors should carefully consider.

Features and Structure

Perpetual bonds provide periodic interest payments, known as coupons, but unlike traditional bonds, they have no maturity date. These payments can theoretically continue indefinitely. Coupon rates are often fixed, though some issuers include step-up clauses that gradually increase rates to attract investors.

Governments, financial institutions, and large corporations with strong credit profiles typically issue these bonds. They are often structured as subordinated debt, meaning they rank below other liabilities in liquidation. This lower priority increases risk for investors, which is why perpetual bonds tend to offer higher yields than standard fixed-income securities.

Many perpetual bonds include callable features, allowing issuers to redeem them after a set period, usually five to ten years. This benefits issuers, who can refinance if interest rates decline, but creates reinvestment risk for investors, who may have to reinvest at lower rates if the bond is called.

Types of Perpetual Bonds

Perpetual bonds come in different forms, each tailored to specific investor needs or issuer objectives.

Hybrid perpetual bonds combine debt and equity characteristics, making them common among financial institutions. Banks use these instruments to meet Basel III regulatory capital requirements, as they count as Additional Tier 1 (AT1) capital. Unlike traditional debt, these bonds often allow issuers to skip interest payments without triggering default, which helps financial stability but increases risk for investors.

Inflation-linked perpetual bonds adjust coupon payments based on inflation indices like the Consumer Price Index (CPI). This ensures investors maintain purchasing power over time, making them appealing during inflationary periods. Governments sometimes issue them to manage long-term liabilities while offering investors a hedge against rising prices.

Convertible perpetual bonds allow bondholders to convert their holdings into equity under predetermined terms. This feature is attractive in industries with strong growth potential, as investors can benefit from stock price appreciation while still receiving bond-like income. Companies use these instruments to raise capital without immediate equity dilution, balancing debt and shareholder interests.

Credit Rating Influence

A perpetual bond’s credit rating reflects the issuer’s financial strength and ability to meet ongoing interest obligations. Since these bonds have no maturity date, rating agencies focus on the issuer’s long-term solvency, earnings stability, and regulatory environment. A downgrade can sharply reduce bond prices, as investors demand higher yields to offset increased risk.

Regulatory factors also impact credit ratings. In banking and insurance, capital requirements influence how these bonds are treated on balance sheets. Under Basel III regulations, AT1 perpetual bonds must include loss-absorbing features, such as automatic write-downs or conversion to equity during financial distress. This results in lower credit ratings compared to senior debt, as bondholders face a higher risk of losses.

Investor perception plays a role as well. A perpetual bond issued by a government with a strong sovereign rating, such as the United States or Germany, is considered lower risk than one from a corporation with financial instability. Even among corporate issuers, industry stability and competitive positioning affect ratings. A utility company with predictable cash flows may receive a higher rating than a technology firm operating in a volatile market.

Trading and Liquidity

Perpetual bonds primarily trade in the over-the-counter (OTC) market, where institutional investors such as pension funds, insurance companies, and asset managers dominate transactions. The absence of a maturity date makes pricing highly sensitive to macroeconomic factors, particularly interest rate movements. When rates rise, perpetual bond prices tend to drop more sharply than conventional bonds due to their extended duration risk.

Liquidity varies based on the issuer, market conditions, and investor sentiment. Highly rated government-issued perpetual bonds generally trade more consistently, while corporate perpetuals—especially those with callable features—can experience periods of illiquidity. Limited secondary market participation often results in wider bid-ask spreads, making it costlier to buy or sell these bonds.

Market depth also affects liquidity. Larger issuances tend to attract more trading activity, and bonds included in major fixed-income indices, such as the Bloomberg Global Aggregate Index, benefit from ongoing buying and selling by index-tracking funds and exchange-traded funds (ETFs). In contrast, perpetual bonds from emerging markets or lesser-known corporations may trade infrequently, making it harder to find a counterparty at favorable pricing.