A bond is termed as a debt instrument in which the issuer promises the borrower to pay the principal amount within a stipulated time along with the interest. As a bond is a type of loan, there is a date on which the borrower gets his money back and that date is termed as maturity date but there is a bond that doesn’t have a maturity date.
Perpetual bonds:
Perpetual means something which has no ending or which happens repeatedly so frequently that it seems as if it never ends. Perpetual bonds are those bonds that don’t have any maturity date because of which they are often treated as equity and not as debt. In such scenario, the issuer doesn’t need to pay the principal amount but he has to pay the coupons forever on regular intervals. One considerable difference between perpetual bonds and equity is that paying coupons is compulsory while paying dividend depends on the organization’s discretion.
Perpetual bonds are fixed income securities and nowadays they are mostly issued by the banks. These bonds are classified in the Tier 1 capital and they have a callable date but the first call date can be fixed only after the five years from the date on which the bond was issued.
Here are some benefits of perpetual bonds:
- These bonds are fixed income securities on which payments are made on fixed schedule
- The borrower gets benefitted when the interest on the bond is increased by the issuer as decided on a particular point.
Some risks associated with the perpetual bonds:
- The credit risk exposure is perpetual in these bonds as there may be chances that the organization or institution which has issued these bonds may face some financial troubles in the future.
- These perpetual bonds may be called by the issue, however still the good thing is that these bonds can’t be called before five years have passed from the date of issue. This period is called call protection period.
- If the interest rates are rising at a high rate then the value of perpetual bond can go down significantly.
USD Bonds
Now after talking about perpetual bonds, let us talk a little about the USD bonds:
USD bonds are also referred as dollar bonds and these bonds are US denominated bonds which are traded out the United States of America. These dollar denominated bonds are issued by the US organizations but not in US, outside US. They can also be issued in US but then they have to issued by foreign organizations and as they are denominated in dollar, they are accepted widely especially in comparison to those bonds which are denominated in other currencies.
The investors of the US market like to invest in USD bonds which are issued by foreign parties because their denomination is in dollars which makes the return higher from what they get in the domestic market of the issuer. The foreign issuers also like to issue USD bonds as they are pretty helpful for them in raising capital from American investors.
