What Is Perpetual Debt?
Sometimes known as constant debt, perpetual debt is a type of debt instrument that is purchased with the goal of generating a steady stream of income in the form of interest payments. In most cases, the principal paid for the debt instrument is not redeemed and the investor continues to enjoy the flow of payments from the investment over the long term. Perpetual debt instruments can be held for years or even decades, or sold when and as the investor chooses to move on to other types of investments.
One of the more common examples of perpetual debt is the perpetual bond. Unlike other bond issues, this type of bond does not have a maturity date. Investors can choose to buy the bond issue and receive interest payments on that principal based on a set schedule that is included in the bond’s terms and conditions. A perpetual bond may be structured with a fixed or a variable rate of interest, meaning that the amount of those interest payments may increase or decrease over time. Since the bond cannot be redeemed, the investor has the option of selling the bond to another investor at any time after the purchase, relinquishing all claims on future interest payments to the new owner.
Both investors and the originators of perpetual debt benefit from this arrangement. Investors have the opportunity to create a reliable and regular source of income composed of interest payments tendered according to a set schedule. Originators of the debt do not have to be concerned about repaying the principal as long as the interest payments continue in accordance with the debt instrument’s terms. The end result is a financial arrangement that provides advantages for each party over the long-term.
As with any type of investment activity, there is a need to look closely at perpetual debt investments before choosing to acquire a perpetual bond or other type of constant debt option. For the investor, considering the stability of the issuer is very important, especially if the goal is to purchase the perpetual debt as a means of generating ongoing income for a number of years or even decades. The rate of interest that applies to the debt is also important, since the rates will impact how much the investor receives when each interest payment comes due. If the amount of the payments is not enough to create the desired flow of interest income, then focusing on other types of investment opportunities may be a good idea.
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