Bonds perpetual. Perpetual bonds: an introduction to eternal life. Pitfalls in manipulating Eurobonds

When companies and governments need to raise money, they issue bonds. Investors buy bonds, mainly by providing loans to the issuer. In exchange for the loans, the issuer agrees to pay interest to the buyer of the bonds for a specified period of time.
With perpetual bonds, the agreed period during which the interest will be paid is “forever,” as perpetual bonds live up to their name and pay interest indefinitely. In this respect, perpetual bonds function in the same way as stocks that pay dividends or some preferred securities. Just as the owner of a share receives a dividend payment for as long as the share is held, the permanent owner of a bond receives an interest payment for as long as the bond is held.
History and future
Eternal bonds have a long history. The British government is often credited with creating the first track as early as the 18th century. While not as popular as the more well-known Treasury and municipal bonds, perpetual bonds continue to be issued today.
Looking ahead, the argument can be made that issuing perpetual bonds would be an attractive proposition for owed global governments. For financial conservatives, the idea of \u200b\u200bissuing any kind of debt doesn't seem like a good idea, and debt that never ends would be completely incomprehensible, but perpetual bonds have a certain appeal during tough times. By its very nature, issuing perpetual bonds would allow a financially challenged government to raise money without requiring it to be returned. This approach supports several factors. First, interest rates are unusually low for long-term debt. Second, when inflation is factored into the equation, investors actually lose money on the loans they lend to the government.

For example when interest ratewhich investors receive is 0.5% and inflation is 1%, the result is an inflation-adjusted interest rate for investors of -0. five%. In dollars and cents, this means that when investors get their money back from the government, its purchasing power will be diminished. Think of it this way: An investor lent the government $ 100. One year later, the investment cost is $ 100. 50 interest rate courtesy of 0.5%. But with inflation running at 1%, it now takes $ 101 to buy the same basket of goods that cost just $ 100 a year ago. Unfortunately, investors only have $ 100. 50. The rate of return on their investments did not match the rise in inflation.

Inflation is expected to increase over time, giving out money today at a hypothetical interest rate of 4% will seem like a deal with government bean counters in the future when inflation hits 5%. Of course, most perpetual bonds are issued with requirements clauses that allow the issuer to redeem at the expiration of the specified maturity. Thus, the “perpetual” portion of the package is often chosen rather than by mandate and can be eliminated if the issuer has cash to pay off the loan.
Benefits for Investors
Endless bonds are of interest to investors because they offer stable, predictable sources of income. Payments are made according to a set schedule, and some even have a "raise" function that increases the interest payment at a predetermined point in the future. IN technically this is called "growing indefiniteness." For example, a perpetual bond can increase its yield by 1% at the end of 10 years. Likewise, it may propose periodic increases in interest rates. Paying close attention to any additional clauses is an important part of comparative shopping for investors looking for perpetual bonds. A growing eternity can be good for your wallet.

Investor risks
There are various risks associated with perpetual bonds. Perhaps most notably, an eternal period is a long time for credit risk to occur. Over time, bond issuers, including governments and corporations, may face financial problems and even fail.
Perpetual bonds can also be at risk of challenge, which means that the issuer can call them back.

Another significant risk over time is that general interest rates can rise as the years go by. If rates rise significantly, the interest rate paid by the perpetual bond could be much lower than the current interest rate, meaning investors could earn more moneyholding another bond. In such a scenario, the perpetual bond must be sold on the open market, at which time it may be worth less than the purchase price as investors lower their offers based on interest rate differentials.
Determination of cost
Investors can determine how much they will earn (yield on bonds if held to maturity) by doing a relatively simple calculation. Below is the formula and example:

A $ 100 bond trading at the discounted price of $ 95.92 and paying a coupon of 5% would have a current yield of 5-21%.

Since perpetual bonds have no maturity, payments (in theory) will continue forever.
Since money loses value over time (inflation plays a role here), interest payments made by perpetual bonds are less important to investors over time. Thus, the price of a perpetual bond is a fixed interest rate or coupon amount divided by the discount rate, with the discount rate representing the rate at which money loses value over time. For permanent bonds that offer increasing perpetuity, a different mathematical formula can be used to determine its value.

If all this math makes you spin, don't worry. In the era modern technologies there is a much faster way to get this information. Instead of doing manual calculations with pen and paper, simply go online and search for "perpetual bond calculator yield." Enter some information, including the price of the bond and the amount of annual interest payments it will make, and the calculator will automatically determine the bond's interest rate. This is a quick and easy way to do math.
Bottom line
If perpetual bonds have caught your interest, some of them are available in the financial market. Many of them are overseas in markets such as India, China and the Philippines. A quick online search will get you started as you can easily find links to securities issued by Cheung Kong (Holdings), Agile Property Holdings and Reliance Industries. If you get a little more serious, you can always call your local broker, who should not only provide a list of suggestions, but also discuss the pros and cons of specific valuable papers.

Perpetual bonds are believed to be more suitable for issuance public debt... The state is a reliable borrower. By issuing perpetual bonds, it reduces the cost of refinancing debt when issuing new loans. It should be understood that for the issuer the issue of such bonds is beneficial when the rate of money on the market is low - money is cheap. Another advantage of such bonds over preferred shares for the issuer is that payments, as we have already indicated, do not depend on the company's profits. If the issuer gets good profit over time, and it is constantly growing, he will simply be obliged to share with shareholders. In the case of a perpetual bond, there is no such limitation - the coupon is fixed in time or tied to the interest rate in the money market.

Banks are interested in issuing perpetual bonds, since the funds received can be included in the capital of the first (as capital received from the placement of shares) or the second level, which allows the bank to build up its loan portfolio.

Investor benefits

The investor's benefit is the constant receipt of the coupon. Moreover, this coupon will be higher than in bonds with a maturity, and more stable than the dividend on preferred shares. it effective tool rental yield. For an investor, the invested money has no special value, they are long-term, he is not going to take it from the market tomorrow. As a rule, we can talk about pension funds, for whom it is important to receive a higher profitability from the placement of pension reserves, but under the terms of agreements with depositors, the probability that they all come at once and withdraw funds is zero.

The benefit of a speculator and an investor who makes investments for a short period is that in the event of a crisis on financial market the cost of money rises sharply - loan rates begin to exceed the usual market values... At such moments, the value of bonds falls sharply - sales start on the market, and bond prices become attractive for purchases. Moreover, the biggest drop falls precisely on bonds with long maturities. Speculators buy such bonds, and then, when the market recovers, sell them at a large profit, while receiving more income in the form of a coupon. Bonds bought at such moments become very profitable for the investor - the coupon remains the same, but buys such a coupon new owner bonds with a significant discount.

Exit Perpetual Bond

An investor or speculator can exit such a security in two ways: sell them at secondary market or wait for the issuer to exercise a call option, at which these bonds will be redeemed by the issuer. In any case, the price of the bond will be the market one, that is, its value will depend on the state of the money market and the current interest rate. If the rate is low, then the price of the bond will be high. If the rate is high (there is some pessimism in the market, expectation of a crisis), then such a sale will be unprofitable. The most important thing for a bond is market liquidity and the bid / ask spread.

Perpetual bond issues by Russian issuers

In Russia, banks resort to issuing perpetual bonds - VTB, Gazprombank, Alfa-Bank, Promsvyazbank and Tinkoff Bank". These bonds are issued as Eurobonds and are denominated in US dollars. Moreover, VTB and Gazprombank have a floating coupon yield on the perpetual bond - it is tied to the yield on US Treasury bonds plus a certain percentage. VTB has 10-year bonds + 8.1%, Gazprombank has 5-year bonds + 7.1%. The coupon yield is fixed. Alfa-Bank and Tinkoff Bank"- 8% and 9.25%, respectively. The actual coupon yield will depend on the price at which the bond was purchased.

In rubles, there are only bonds of Rosselkhozbank - they are traded on the Moscow Stock Exchange. The coupon yield is very high (about 14%), so at the moment the price of these bonds is almost 20% higher than par.

Output

The Perpetual Bond is a tool with a twist. It can be viewed as a separate type of security - something between just a bond and preferred share... This tool is interesting for those who have very “long” money, but want to receive a stable rental income above the market. For a speculator, they will be attractive at the time of the crisis because of the fall in value and the great potential for its recovery after overcoming the crisis in the market.

What is eternity? This is something that is timeless. Eternal Jew, Eternal City, eternal or perpetual bonds on the stock exchange - this is something that will not fade over time and will always be. Touching the infinite can transform Us - investors - it can lead Us to spirituality. It is able to fill our soul with kindness, beauty, the forces of immortal feeling.

Perpetual Bonds: Beyond the Present.

Nervous tension, fatigue, a feeling of emptiness and loss tear the souls of those who have not yet touched eternity. Merging with the infinite allows Us to experience new feelings, visit new dimensions, understand our place in the structure of the universe, relive the memory of our ancestors.

The first perpetual bonds were received by investors in the 18th century. The British Empire replaced their promissory notes with them. Our ancestors - holders of the first perpetual bonds - received 3.5% per annum forever. These bonds are still traded today.

Now the size of the market for consoles - perpetual debt - is equal to $ 530 billion... These days, consoles are mostly produced by large private banks.

Modern endless bonds are usually issued with a call option, that is, they are not always perpetual. The Issuer reserves the right, if desired, to redeem securities from the market at a pre-agreed price - the option price. In 2016, Rosselkhozbank placed an issue for 5 billion rubles, retaining the right to redeem securities every ten years.

Features of interaction with infinity.

Finding a connection with infinity implies detachment from the thoughts and sensations of the mortal body, focusing on the beauty and completeness of the cosmos, nature and God's plan. Communication with space is useful and pleasant, but money, too, cannot be taken and lost. Therefore, before leaving the world, it is advisable to familiarize yourself with the features of consoles and the nuances of investing in them.

1. Most of the perpetual bonds are denominated in foreign currency, and the minimum lot is 200,000 foreign moneybut there is also rubles with a minimum lot of 1,000 rubles.
2. The risk of losing money when investing for eternity is much higher than when investing for a short time, because there are few eternal companies.
3. Due to the increased risk, the amount of coupon payments is usually higher than that of other debt securities of the same issuer.
4. Sometimes securities are issued with a fixed variable coupon. After the call option expires, the amount of interest payments changes. The amount of payments is calculated according to a predetermined formula, then it is either fixed or becomes floating, pegged to the exchange rate of other securities, currencies, and the Central Bank rate.
5. There are cumulative consoles - there is no obligation to make payments regularly. Allowed payments accumulate, are carried over to later periods.
6. The issuer redeems endless bonds when not profitable to pay on them the rent. If the interest rate of the Central Bank becomes much lower than the rent that the issuer pays, then it is more profitable for him to redeem the issue and place a new one with a reduced coupon.
7. The price of a bond on the exchange is indicated in % from the face value, and not in monetary terms.
8. Experts recommend:
   If less than 5 years are left before the option comes, focus on the profitability of the securities and the reliability of the company.
   If there is more than 5 years before the option expires, choose the largest amount of payments and a reliable company.

The current profitability is determined by the formula:

Y - current yield in percent;
k - annual rate coupon;
N - face value;
K - market value as a percentage;
P - market value in monetary terms.

The yield to maturity is determined by the formula:

YTM - yield to maturity in percent;
m is the annual number of coupon payments.

Filling the body with pure delight of endless beauty.

By purchasing perpetual bonds of reliable companies, We - ordinary investors - are touching the endless beauty of the universe. Breaking free from the shackles of momentary worries of mortal existence, We dissolve in the abyss of endless happiness. There is no more, no nervous tension, no feeling of loss, no spiritual emptiness, but only immeasurable lightness and fullness of the soul outside of time.

Perpetual bonds orperpetuals) are never executed. There is no maturity date for these bonds. Therefore, the issuer should never return the attracted denomination. The issuer is only required to pay coupon interest payments.

Over the past 3-5 years, many largest banks in the US and Europe have increased the issue of perpetual bonds. but, the banking industry's motives for issuing perpetual obligations are different from those of corporate borrowers. Bank perpetual bonds are subordinated and qualify as Tier 1 capital, which allows banks to meet capital requirements in accordance with Basel rulesIII... The coupon on such bonds ranges from 9.5% to 12%.

Traders or institutional investors can profit from the perpetual bond market through 1) movements in interest rates and 2) changes in the credit spread (relative to Treasury issues). High duration allows you to make money even with small movements in profitability orspread.but, the main characteristic of perpetual debt securities is a relatively high coupon compared to standard corporate bonds.

Buyback option (call feature)

Perpetual bonds may have a built-in call feature. This effectively means that the issuer has the right to redeem the bonds (forcibly) at a certain point in time..

It is beneficial for the issuer to use this option if interest rates in the economy have dropped significantly. In this case, the issuer pays off the debt and re-issues a new perpetual bond with a lower coupon rate, which will reduce interest costs for the company. Thus, the buyback option is an advantage for the issuer and a disadvantage for the investor. therefore, perpetual redemption bonds must have a higher coupon relative to non-eligible bonds.

As a rule, the issuer does not have the right to redeem the issue when the management of the company wants to. This can only be done at certain intervals, for example, after 5 or 10 years. Early redemption figures are given in the bond prospectus.

Benefits of perpetual bonds

1. The investor can fix the coupon interest rate for a very long time. There is no need to worry about raising or lowering interest rates.

2. The proposed interest rate on perpetual issues may exceed the yield on 10 year oldsUS Treasuriesby 2.5% -4.0%. The offered interest rate (coupon) will also depend on the creditworthiness of the issuer. The higher the credit quality, the lower the interest rate. Therefore, by investing in perpetual bonds, an investor can earn much higher returns than on a bank deposit..

Cons of perpetual bonds

1. Invested capital is theoretically stuck forever. Even if the investor decides to sell the issue on the secondary OTC market, you need to understand the liquidity risk.

2. The investor must trust the credit quality of the issuer. If a company's credit metrics deteriorate in a few years, rating agencies may downgrade the rating. And since perpetual bonds have a high duration, drop from rating downgrade will be strong.

3. Since perpetual bonds are usually subordinated, holders of other debt issues will have priority over the holders of perpetual bonds (in the event of liquidation).

4. Each investor should carefully study the covenants described in the prospectus. Some issues have the right not to pay the coupon at all, if the company has suffered an annual loss in this year ... This condition effectively equates perpetual bonds with stocks. It is for this reason that these bonds qualify as equityI-the first level for banks. Thus, even if an investor purchased a perpetual bond due to the high coupon rate, he may not receive it..

The history of the creation of perpetual bonds

Perpetual bonds have a long history. The creation of the first perpetual bond can be attributed to the British government in 1751. These are known as consoles (short for consolidated annuities) and could be executed at the discretion of the government. Perpetual bonds were also issued by the British Treasury to pay for the minor costs associated with financing Napoleon's wars in 1814.

However, there is an older example of a 1648 perpetual bond issued by the Dutch water resourcesresponsible for the maintenance of local dams. Today the bond belongs to Yale University, which bought it in 2003 as a cultural artifact. This 370-year bond still pays annual interest. Originally it was assumed that the issue would pay 5%, then the rate was reduced to 3.5%, and then to 2.5% in the 17th century.

The 2.5% yield is still pretty decent considering that European government bond yields are trading below zero..

Perpetual bond pricing

Assessing the attractiveness of a perpetual bond is very simple using the following formula:

Yield \u003d С / P

С - annual interest payment received by the owner of the bond

P is the market price of the bond

Discount rate reduces real value nominal fixed coupon payments over time, eventually equating them to zero. Thus, despite the fact, what perpetual bonds pay interest forever, yet you can determine their final value.

For example, a bond with a par value of $ 100, trading at a premium at a price$ 103 in the secondary market and paying a coupon rate of 5.25% would have a current yield of (current yield) at the rate of 5.10%.

Some perpetual bonds have a built-in characteristicstep-up. This means that the coupon rate will increase by a certain percentage every 5-10 years. Thus, a periodic increase in the coupon may be envisaged.

In any case, these additional characteristics are attractive to investors in the current environment., when the level of returns is very low.

Bonds with embeddedstep-upor the buyback option change the calculation fair price bonds. However, there are many free online calculators available to calculate a fair price..

Eternal bond / obligatsiya vechnaya /
Having invested money once, the investor gets interest income unlimited time, but the capital itself is not returned.

The coupon rate for such bonds is usually higher than for conventional bonds. The increase in the coupon rate is made in such a way as to repay the principal amount within a certain period, after which the bondholder will begin to receive a net income.

Interest is calculated as long as the bond is held by the owner. As a rule, it is issued with a floating interest rate.

Also, a perpetual bond - special case bond, which the issuer is not obliged to redeem, therefore, the owner of the bond has the opportunity to receive income for this security for as long as necessary In the most general sense, a bond is promissory noteissued by the state or any organization that has the right to do so, establishing the issuer's obligations to pay interest for the loan for the period of the loan and to repay it at the end of the loan period par value in monetary or other material terms.

Of the perpetual bonds, the most famous are British consoles - government bonds, which were repeatedly discussed by the heroes of the Forsyte Saga as a benchmark for a risk-free asset. The first consoles (consolidated loan bonds) appeared in 1753 and after a series conversion operations (last conversion happened in 1888) are still traded in London. The coupon rate was gradually reduced from 3.5% to 2.5%, and since 1923 the bonds can be redeemed at any time by the decision of Parliament.

In Russia, the first perpetual bonds were issued by VTB Bank in 2012, soon followed by Gazprombank. Perpetual bonds usually differ relatively high rate coupon: for example, VTB raised funds at the rate of 10-year US government bonds plus 806.6 basis points, Gazprombank - at the rate of 5-year US government bonds plus 710 bp. P.

Despite their unusual nature, perpetual bonds do not protect the investor from traditional risks: in the event of an issuer's bankruptcy, they either give the same rights as ordinary bonds, or end up in the queue behind them for redemption.

Sources used
1.http: //jur.vslovar.org.ru/9575.html Raizberg B.A., Lozovsky L.Sh., Starodubtseva E.B. Modern economic vocabulary - Moscow, 2003
2. Konoplitsky V., Filina A. This is business: Explanatory words. economy terms - Kiev, 1996
3. Lozovsky L.Sh., Blagodatin A.A., Raizberg B.A. Exchange and securities. Dictionary - Moscow, 2001

4.http: //st.finam.ru/ipo/comments/_Perpetual%20bonds.pdf

5.http: //rosinvest.com/page/vechnyj-dolg

6.http: //www.banki.ru/wikibank/bessrochnyie_obligatsii/