Table of Contents
Introduction
A successful portfolio mix is the use of debt and equity instruments. In India, the debt market is still in its early stages. It offers a variety of bonds like Fixed and floating-rate bonds and zero coupon bonds, corporate bonds, perpetual bonds, commercial paper, treasury bills, and other options. These instruments, like perpetual bonds, can yield attractive returns with relatively small risks.
What are Perpetual Bonds?
The perpetual bond can be described as an asset earning a fixed income with no expiration date. These bonds are usually viewed as equity, not debt. There is no date set to redeem the principal. However, the owner will be receiving regularly-scheduled interest. Bond coupons are permanent, so they’ll continue to be paid regularly.
The bond market, which will last for a lifetime, is comparatively tiny. This is because only a few banks or corporations can convince bondholders to invest their money in an investment that will never receive the initial amount they invested.
The pros and cons of perpetual bonds
Pros:
- Perpetual bonds and other kinds of bonds appeal to investors as they offer the security of fixed income. The bond terms and conditions, including their interest rates, are established when bonds are issued.
- Unlike traditional bonds, unlimited coupon-based payments for perpetual bonds cannot expire and could provide investors with interest for a long time.
- Even though it is possible to run into the risk of default and fluctuations in interest rates, The risk from investing in perpetual bonds is much less than that of investing in stocks. If a company declares bankruptcy, the claims of people who own perpetual bonds would be settled ahead of those of the shareholders.
Cons:
- There is a cost for purchasing perpetual bonds, also known as “opportunity cost,” because other investment options may give a more significant ROI.
- The issuer may ask for the bond’s redemption when an agreed-upon period has expired.
- If you invest in perpetual bonds, you expose yourself to the risk of inflation or the chance that the primary and interest payments will not rise fast enough to keep up with the inflation rate. This could affect your purchasing ability.