Background
A perpetual bond, or “perp,” is a bond with no maturity date. As a form of debt finance, these instruments are generally used by institutions to raise long-term capital and are unique due to their endless interest payments to bondholders, making them a type of perpetuity in finance.
Historical Context
Perpetual bonds date back to the early 18th century. One of the earliest and most well-known examples is the British Consol, first issued in the 1750s to consolidate various pieces of national debt. These historical examples underline the utility of perpetual bonds in public finance and debt management strategies over extended periods.
Definitions and Concepts
- Perpetual Bond: An irredeemable bond that does not have a maturity date. It pays the holder a constant stream of interest payments indefinitely.
- Perpetuity: A type of financial instrument or arrangement where periodic payments continue forever.
Major Analytical Frameworks
Classical Economics
- Demand for Long-term Securities: Perpetual bonds are analyzed for their role in providing finance over very long horizons, aligning well with the investment outlooks of certain institutions.
Neoclassical Economics
- Present Value Calculations: Requires valuing a perpetual bond through discounting its infinite series of payments, typically using the present value of perpetuity formula.
Keynesian Economics
- Government Debt Management: Contextual use of perpetual bonds in managing national debt sustainability under Keynesian fiscal policy could be examined.
Marxian Economics
- Capital and Income Distribution: Evaluates the implications of perpetual bonds in income from interest, influence on wealth accumulation, and class structures.
Institutional Economics
- Market Stability: Understanding the role of institutional behavior in preserving confidence in instruments like perpetual bonds, amid evolving market dynamics.
Behavioral Economics
- Perception of Infinite Stream Payments: How psychological biases impact investor decisions regarding perpetual bonds will be central, focusing on perceptions of infinite returns versus the risk of dilution.
Post-Keynesian Economics
Austrian Economics
Development Economics
Monetarism
Comparative Analysis
Contrasted with other bonds, perpetual bonds hold a unique risk-reward profile due to their indefinite term, distinct liquidity considerations, and often slightly higher yield due to perceived risks. They can be compared to corporate equity as both theoretically offer an indefinite stream of returns.
Case Studies
- British Consols: Historical example tracking their issuance, funding wars, and how varying interest rates impacted value over centuries.
Suggested Books for Further Studies
- “Fixed Income Analysis” by Frank J. Fabozzi
- “Debt Markets and Analysis” by R. Stafford Johnson
- “Bond Pricing and Portfolio Analysis: Protecting Investors in the Long Run” by Olivier de La Grandville
Related Terms with Definitions
- Coupon: Periodic interest payment made to the bondholder during the life of the bond.
- Annuity: A series of payments at regular intervals, often compared to perpetuities but with a finite term.
- Yield: The return on bonds or other financial instruments, often expressed as a percentage.
- Zero-Coupon Bond: A bond that does not pay periodic interest but is issued at a discount to its face value.
- Callable Bond: A bond that can be redeemed by the issuer before its maturity.
- Convertible Bond: A bond that can be converted into a predetermined number of shares of the issuing company’s stock.
