There is no maturity date for perpetual bonds, commonly referred to as Consol bonds. Perpetual bonds continue to pay interest continuously, in contrast to conventional bonds, which have a set maturity date after which the holder receives their principal back. For individuals seeking reliable, long-term income streams, this may make them a desirable investment. But the issue of selling perpetual bonds still stands.
Yes, you can sell perpetual bonds, to put it briefly. Despite not having a maturity date, they can still be bought and traded on the open market because they are marketable securities. The absence of a maturity date, however, can make them more challenging to appraise and trade than conventional bonds.
It’s critical to comprehend perpetual bond pricing in order to comprehend how they are valued. Bonds with a perpetual maturity pay a fixed interest rate on the bond’s face value known as the coupon rate. A $1,000 Consol bond, for instance, would earn $50 in interest annually at a 5% coupon rate. The cost of the bond is determined by the present value of the future cash flows, which include coupon payments and the eventual return of the bond’s face value.
A discount rate, which represents the investor’s anticipated rate of return, is used to compute the present value of the future cash flows. Interest rates, inflation, and credit risk are some of the variables that have an impact on the discount rate. The bond will be sold for less than its face value, or at a discount, if the discount rate is larger than the coupon rate. The bond will be sold for more money than it is worth, or at a premium, if the discount rate is lower than the coupon rate.
The discount rate used in the valuation is often based on the yield of bonds with similar maturities because perpetual bonds have no maturity date. As an illustration, a benchmark for a perpetual bond might be a 30-year Treasury bond. The yield curve could alter over time, influencing the discount rate employed in the calculation, which could complicate the value.
In conclusion, although perpetual bonds are marketable, their absence of a maturity date may make them more challenging to value and trade than conventional bonds. The present value of future cash flows, which is dependent on the discount rate employed in the computation, is what determines the value of a perpetual bond. Since perpetual bonds don’t have a set maturity date, the discount rate is often determined by the yield of bonds with a similar maturity, which might complicate valuation calculations.