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# Perpetual bond

Perpetual bond, which is also known as a perpetual or just a perp, is a bond with no maturity date.[1] Therefore, it may be treated as equity, not as debt. Issuers pay coupons on perpetual bonds forever, and they do not have to redeem the principal. Perpetual bond cash flows are, therefore, those of a perpetuity.

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• ✪ The Centuries-Old Debt That's Still Paying Interest
• ✪ What You Need to Know Before Investing in Perpetual Bonds
• ✪ Florida State University : Delta Delta Delta - Bid Day 2016

#### Transcription

In 1648, the Water Board of Lekdijk Bovendams needed to repair these embankments to make sure that this bit of the Netherlands didn't flood. For that, they needed money, so they sold a bearer bond. Whoever owned that bond would get a little bit of money back from them every year. But, unlike modern bonds, they didn't set a time limit on that. Perpetual debt can be a thing in finance. It's kind of like selling stock in a company, but normally perpetual just means until the company fails. But, this company didn't fail. 3½ centuries later, that original bond ended up.... GPS: "Take exit 47." ...here, at Yale University in New Haven, Connecticut, USA, and it's still paying interest. Perpetual bonds date back to the Middle Ages. All bonds were perpetual bonds and the fact that bonds actually mature and pay back their principal is a financial innovation. The flood plains of rivers, they don't coincide with state boundaries or city boundaries, so they had separate governments that would oversee the levees. These organisations would have the power of taxation. Everybody who was protected by a levee would pay taxes to pay for their upkeep. And they would never go to war, so the combination of being able to tax people and not going to war, which usually bankrupts governments, makes that these bonds are still paying interest until today. Tax collections would have fell short of the budget they needed, so they issued this bond. The water board, which dates back to, I think, 1328 has been merged in larger and larger organisations. They have recombined these water boards and now it's called Stichtse Rijnlanden which pays the interest on the bond. These annotations here are the annual interest payments that have been taking place since 1648. As you go to the other side, you see that the whole other side is also full with little markings which are the interest payments that have taken back over the years. At some point, the bond was full. There was no more space, and they issued this piece of paper here which is a continued marking of the interest payments. When Yale bought the bond in 2003, and we collected our interest payment, you see that the last interest payment had been taken place in 1976. So, there was 27 years of back interest that was due. We left the bond here for 12 years, and then, in 2015, we collected '04, '05, '06, all the way down to 2015. Well, there was actually a picture somewhere of me in Holland where I hold the bond in one hand and I got interest payments for Yale with my other hand as the bearer of the bond. It's a little disappointing. The bond initially was for 1,000 carolus guilders. Carolus guilders became other guilders, I think. They became, now, Euros. At some point, they lowered the interest payments a bit. So, to make a long story short, every year, we get €11.35 interest payment on this bond. You know, the value of this bond, obviously, is in the fact that it's live. It's probably just as exciting for them as it is for us to be able to present the bond and have an opportunity to pay interest. Now, the Dutch water authority could probably default on the debt if they wanted to. It costs more than the bond is worth to fly someone over every couple of decades. And let's face it, Yale would be unlikely to launch an international lawsuit. But, for about one Euro a month, the Water Authority gets to be part of a weird bit of living financial history, and get a bit of good publicity out of it too. It might not be a subscription they'd take out deliberately, but apparently, for them, it's worth it. I think they have a pretty good track record. They sound like a triple-A organisation to me, and I think we're going to be good for a while.

## Perpetual bonds vs. equity

• Although similar to equity, perpetual bonds do not have attached votes and, therefore, provide no means of control over the issuer.
• Also, perpetual bonds are still fixed-income securities; therefore, paying coupons is mandatory whereas paying dividends on equity is discretionary.

## Examples

• Examples of perpetual bonds are consols that were issued by the United States and the UK governments.
• One of the oldest examples of a perpetual bond was issued in 1648 by the Dutch water board of Lekdijk Bovendams. It is currently in the possession of Yale University and interest was most recently paid by the eventual successor of Lekdijk Bovendams (Hoogheemraadschap De Stichtse Rijnlanden) in 2015.[2][3]
• Most perpetual bonds issued nowadays are deeply subordinated bonds issued by banks. The bonds are counted as Tier 1 capital and help the banks fulfill their capital requirements. Most of these bonds are callable, but the first call date is never less than five years from the date of issue—a call protection period.

## Pricing

Perpetual bonds are valued using the formula:

${\displaystyle {\text{Price}}={\frac {I}{y}}}$

where:

• ${\displaystyle I}$ is an annual coupon interest on a bond.
• ${\displaystyle y}$ is an expected yield for maximum term available.[4]

## References

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