Perpetual Bonds: What They Are and How You Can Use Them

Ever seen a bond that never quite says "maturity"? That’s a perpetual bond – a loan that pays interest forever, unless the issuer decides to call it back. Think of it as a hybrid between a regular bond and a dividend‑paying stock. Because they don’t have a set end date, they can offer higher yields, but they also come with special quirks you should know before you jump in.

What Are Perpetual Bonds?

At their core, perpetual bonds are debt instruments that pay a fixed coupon (interest) for an indefinite period. The issuer – often a bank, utility, or government – promises to keep the payments going as long as it remains solvent. There’s usually a call option that lets the issuer redeem the bond after a certain number of years, say 10 or 20, but until then you keep receiving the coupon.

Because there’s no final repayment of principal, investors treat perpetuals a bit like high‑yielding stocks. They’re commonly listed as "Hybrid Capital" on balance sheets, especially for banks that need to meet regulatory capital requirements. That’s why you’ll see them paired with terms like "Tier 1 capital" in financial news.

Key Things to Watch Before Buying

Yield vs. Risk: Higher coupon rates are the main attraction, but they reflect higher risk. If the issuer’s credit rating drops, the market price of the bond can fall sharply. Keep an eye on credit ratings from agencies like Moody’s or S&P.

Call Feature: Most perpetuals can be called after a set period. If interest rates fall, the issuer may pull the bond early, forcing you to reinvest at lower rates. Look for the call schedule in the prospectus to gauge this risk.

Liquidity: Perpetual bonds aren’t as actively traded as regular government bonds. You might have to hold them longer or accept a bigger price swing to sell.

Tax Treatment: In many countries, coupon payments are taxed as ordinary income, not as capital gains. Factor that into your after‑tax return calculations.

Fit in a Portfolio: Because they act like a blend of debt and equity, perpetuals can add income and diversify risk. They’re especially useful for investors who already have a solid core of short‑term bonds and want a boost in yield.

To get started, check out the bond section of your brokerage platform and filter for "perpetual" or "hybrid" securities. Read the offering memorandum carefully, and compare the coupon, call dates, and credit rating against similar options.

Remember, perpetual bonds aren’t a one‑size‑fits‑all solution. If you’re comfortable with a little extra volatility and want a steady stream of income, they can be a smart addition. If you need cash in a few years or can’t tolerate price swings, stick to traditional fixed‑term bonds.

In short, perpetual bonds give you the chance to earn higher interest forever, but they come with call risk, credit risk, and sometimes lower liquidity. Do your homework, balance them against your goals, and you’ll know if they belong in your investment toolbox.