Perpetual Bonds Compare

Additional Useful Information

• When an investor purchases a Perpetual Bond, the issuing company is bound by a legal contract wherein they are obligated to make interest payments as per the coupon rate to the investor.

• Every Perpetual Bond is assigned a credit rating by a credit rating agency. Higher credit ratings mean that the safety of the investment is higher, and therefore risks involved are lower. However, lower credit means that the risks of investing in such bonds are higher. Capital Gain Bonds are rated AAA which is the highest credit rating possible and thus, lowest credit risk.

• Investing in Perpetual Bonds is suitable for investors who desire regular passive income.

• The prices of Perpetual Bonds keep changing with a changing economic environment and government policies.

Returns *

• Perpetual Bonds usually provide higher returns as compared to government bonds and bank fixed deposits.

• Perpetual Bonds do not guarantee any returns. However, the probability of negative returns are medium.

• Typically, Perpetual Bonds can generate returns ranging from 7.5% to 14% per year depending on the duration for which they are held and their credit rating.

Risk Level

• Perpetual Bonds are considered medium risk investments. They are riskier as compared to government bonds and fixed deposits.

• Perpetual Bonds have a credit risk associated with them. This means that if the company issuing these bonds default in their commitments, the investor can make losses on the investment.

• Perpetual Bonds become riskier during times of economic downturn. This is because the chance of the issuing company defaulting on the interest payments are higher in these times.

• Based on the credit risk, all bonds are provided with a credit rating by a credit rating agency. This helps in determining how safe or risky the bonds are. Investors should analyse this rating to understand the risk more accurately.

• Perpetual Bonds also have an embedded call option wherein the issuer can call the bond at a specific date by returning the principal amount, maturing the bond on that date.

Liquidity

• Perpetual Bonds are moderately liquid.

• They can be sold at any given time prior to maturity. However, it is possible that there may not be a buyer for the bond. There is no guarantee that the bond will be sold.  In this event, the investor continues to hold the bonds and earn interest.

• Due to the call option, the bond may mature earlier. This would automatically liquidate the bond.

• Sometimes, there is also a put option embedded in the bond. This is where the investor can put the bond and have the issuer pay back the principal amount at the put date, maturing the bond on that date.

Interesting Facts

• Corporate and governmental institutions frequently use perpetual bonds to finance long-term operations or projects since they offer a consistent stream of capital without the need for refinancing.

• Since perpetual bonds have no maturity date, the issuer must compensate the bondholder for the extra risk associated with them by giving a higher coupon rate.

Tax Implications

• Earnings received from Perpetual Bonds are taxable.

• Interest earned by investors from Perpetual Bonds are to be added to their total taxable income and taxes are required to be paid as per the income tax slab.

• When investors sell Perpetual Bonds prior to maturity, the difference between the Sale Amount and Purchase Amount is typically called “Capital Gain” or “Capital Loss” (if sale amount is lesser than the purchase amount).

• The tax that the investor must pay on Capital Gain is –
• Situation 1 – If the Perpetual Bonds are sold within a period of 2 years from investment, the Capital Gains earned (called Short Term Capital Gains) are to be added to the taxable income of the investor and taxes are required to be paid based on the applicable income slab.
• Situation 2 - If the Perpetual Bonds are sold after a period of 2 years from investment, the Capital Gains earned (called Long Term Capital Gains) are to be taxed at the rate of 12.5%.

• There is no tax in case of “Capital Loss”.

Where To Invest

• Invest in Bank Bonds in India with A to AAA ratings | IndiaBonds

• India's #1 Platform for Online Bonds & Debentures Investment - GoldenPi