Perpetual Bonds: What is it, Features, Formula, Risks and Tax Implications

A perpetual bond, sometimes called a ‘perp’ or a ‘consol’, is a debt instrument with no fixed contractual maturity date. Instead of repaying the principal on a fixed date, the issuer pays a steady coupon indefinitely or for as long as the issuing entity exists.

This makes a perpetual bond behave somewhat like a hybrid between debt and equity: it pays interest like a bond, but the investor has no contractual right to get their principal back.

Key Takeaways

• A perpetual bond has no fixed maturity date.
• SEBI mandates a minimum investment and trading lot size of ₹1 crore per AT1 bond, which keeps direct access limited to institutions and very high-net-worth investors.
• Because they carry higher risk and lack a maturity anchor, perps generally offer significantly higher coupon rates than standard senior bonds.
• Almost all perpetual bonds carry a call option letting the issuer redeem them after a set period, typically 5 to 10 years, but the investor cannot force early repayment.

Features of Perpetual Bonds

• No Maturity Date: There is no fixed date on which the principal must be repaid.
• Call Option: Most perpetual bonds include a call option that lets the issuer redeem the bond after a set period, often 5 to 10 years. The investor cannot demand repayment; the choice rests entirely with the issuer.
• Discretionary Coupons: Coupon payments can be deferred, skipped, or cancelled by the issuer if capital or reserve levels fall short, without this being treated as a default.
• Loss Absorption and Subordination: AT1 bonds rank below senior debt and depositors in a bank's payment priority and can absorb losses ahead of, or alongside, equity in a crisis.
• Higher Coupon Rates: To compensate for the added risk and uncertainty, perpetual bonds typically offer meaningfully higher yields than conventional bonds of similar credit quality.

Also Read About: What is Perpetual SIP?

Perpetual Bonds vs Regular Bonds: Know the Difference

The table below sets out how a perpetual AT1 bond differs from a conventional bond such as a corporate NCD or government security.

Feature	Perpetual Bond (AT1)	Regular Bond
Maturity	None; runs indefinitely, subject to issuer call	Fixed maturity date
Coupon Payment	Discretionary; issuer can skip or defer	Contractual; missed payment is a default
Principal Repayment	Not guaranteed; can be written down	Repaid in full at maturity, barring default
Risk Level	High; subordinated, loss-absorbing	Lower, depending on issuer credit rating
Minimum Investment in India	₹1 crore per bond, per SEBI norms	As low as a few thousand rupees for many listed bonds

Also Read About: Difference Between Mutual Funds and Bonds 

How Are Perpetual Bonds Valued?

The mathematical pricing of a perpetual bond is unique because it relies entirely on the perpetuity formula. The theoretical price of a perp is calculated by dividing the annual coupon payment by the prevailing market interest rate.

Formula

Price = Annual Coupon Payment ÷ Market Interest Rate

How Perpetual Bonds Work in India?

• Perpetual Coupon Streams: Investors receive regular periodic interest payments (semi-annual or annual) indefinitely.
• The Call Option Structure: Most corporate and banking perps feature a "call date." On this date (and specific subsequent coupon dates), the issuer can redeem the bonds at par value. If interest rates have dropped significantly, issuers usually exercise this call to refinance at a lower rate.
• Coupon Deferral Clauses: Unlike standard bonds where missing a coupon constitutes a legal default, issuing terms for perpetual bonds often allow the issuer to skip coupon payments during periods of low financial earnings without triggering bankruptcy.

Who Can Invest in Perpetual Bonds in India?

Following the Yes Bank AT1 write-off in 2020, where bondholders lost over ₹8,000 crore when the RBI wrote down the bank's AT1 bonds to zero, SEBI moved to keep small retail investors out of these instruments.

• Direct investment: SEBI mandates that AT1 bonds be issued only to qualified institutional buyers, with a minimum allotment and trading lot size of ₹1 crore per bond, both in the primary market and in subsequent secondary market trades.
• Indirect investment through mutual funds: Retail investors who want exposure typically do so through debt mutual fund schemes that hold AT1 bonds. SEBI caps a mutual fund's AT1 exposure at a set share of scheme assets and requires these instruments to be valued conservatively, treating them as though they mature in 100 years for pricing purposes.

In effect, an ordinary retail investor in India cannot buy a fresh AT1 bond directly; the practical route is through a debt fund that holds a diversified basket of such instruments, spreading the issuer-specific risk.

Who Should Consider Perpetual Bonds?

Given SEBI's ₹1 crore minimum lot size, direct investment is realistically limited to institutions and very high-net-worth individuals. It suits investors who have:

• Risk appetite: The financial capacity to meet the ₹1 crore minimum and absorb a full loss of principal without disrupting their broader finances.
• Understanding of bank capital structures: A working understanding of Basel III capital rules and how banks can exercise discretion over coupons and principal.
• A diversified portfolio already in place: A wider fixed-income and equity portfolio where a small AT1 allocation adds yield without threatening overall stability.

What Should Investors Check Before Investing in Perpetual Bonds?

• Issuer Capital Adequacy: Review the bank’s Common Equity Tier 1 (CET-1) ratio to assess how close it sits to regulatory triggers that could lead to coupon suspension or principal write-down.
• Call History: Check whether the issuer has a track record of exercising the call option on the first eligible call date.
• Liquidity Constraints: Factor in that secondary-market trades require a ₹1 crore lot size and can face wide bid-ask spreads, especially in stressed conditions.

Risks of Perpetual Bonds

• No guaranteed repayment: Since there is no maturity date and repayment depends on the issuer exercising a call option, investors can find their capital locked in far longer than expected if the call is skipped.
• Coupon deferral risk: Coupon payments can be suspended at the issuer's discretion during periods of financial stress, without triggering a default.
• Principal write-down risk: In the Yes Bank episode of March 2020, the RBI directed a full write-down of the bank's AT1 bonds as part of its rescue plan, wiping out the entire principal for bondholders even as equity shareholders retained some value. The case remains the clearest illustration of how AT1 bonds can behave more like loss-absorbing capital than conventional debt.
• Liquidity and pricing risk: Because AT1 bonds are subordinated and their pricing depends heavily on the issuer's capital position, they can be harder to sell at a fair price during periods of stress in the banking sector.

Also Read About: What are Bonds?

Conclusion

Perpetual bonds, and AT1 bonds in particular, offer higher yields in exchange for real structural risk: no fixed maturity, discretionary coupons, and the possibility of a full principal write-down, as Yes Bank bondholders discovered in 2020. SEBI's ₹1 crore minimum lot size reflects this risk by keeping direct access largely to institutions and well-capitalized investors, while retail investors typically get measured exposure through debt mutual funds. Understand the loss-absorption features fully, and consult a financial advisor before considering any exposure to this asset class.