Perpetual Bonds

With interest rates falling, high net worth individuals can look at perpetual bonds. These are issued by banks and companies to raise long- term funds. At 250- 300 basis points, the yield differential between perpetual bonds and 10- year benchmark government securities is currently high. But, yields are expected to shrink in the medium term, within two years. Typically, insurance companies and institutions invest in perpetual bonds. As these are privately placed, bond lead managers subscribe to these in bulk and sell to individual investors in smaller lots. Usually, bonds are issued with a face value of ₹ 10 lakh each. An investor can buy an individual bond and in multiples of one bond thereafter in the secondary market. Perpetual bonds are listed on the wholesale debt market platform and traded over the counter. Liquidity, however, is an issue. The only way to exit is through the call option provided by the issuer, which could be 5- 10 years after the issue, or by selling in the secondary market. As these bonds are perpetual, there is no maturity. But, the ' put' and ' call' options allow an exit route. A call option is when the issuer calls back the bond at a fixed date, usually before maturity. Similarly, a put option is when investors have the option to redeem the bond back to the issuer at a fixed date. While investing in perpetual bonds, investors should look at the liquidity because redeeming these bonds is the only way to gain from interest- rate decline. Investors should also look at the ' yield- to- call' or ' yield- to- put'. If the call option is after 10 years, the yields will be similar to that on a 10- year debenture of the same company While perpetual bonds offer higher coupon rates than taxfree bonds, liquidity could be issue, says Azeez. High net worth individuals who do not get allotment in tax- free bonds could look at perpetual bonds as an alternative, as these have similar features ( assured interest income). And, allotment might be easier for perpetual bonds compared to tax- free bonds. As far as returns go, the yield- to- call ( the yield investors get if the bond is held till the call date) on Tata Steel's perpetual bond is 9.97 per cent. By comparison, Power Finance Corporation offered 7.36- 7.6 per cent for maturities of 10- 20 years. For the latter, the returns are tax- free. While tax- free bonds offer a tax advantage on the coupon, a perpetual bond, though not tax- efficient, offers ahigher coupon rate compared to other bonds with similar ratings. But, perpetual bonds involve relatively higher risk compared to tax- free bonds Perpetual bonds could be used to diversify one's portfolio.  For someone in the highest tax bracket, tax- free bonds are better. But those close to retirement could put some money in perpetual bonds. You could purchase these through debt brokers. Perpetual bonds are subject to longterm and short- term capital gains, as other debt instruments.

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