Perpetual Bonds and the Difference Between Contractual and Expected Life

Summary

Perpetual bonds have no contractual maturity date, so they provide a real-market example of instruments modeled with an infinite lifetime. The document explains that this legal feature does not necessarily mean investors should expect the bond to remain outstanding indefinitely. Many recently issued perpetual bonds are callable, giving the issuer the option to redeem them at specified future times.

A callable perpetual therefore has an open-ended contractual life for the issuer, but a finite expected life. The document notes that many recent issues trade on ordinary bond exchanges, while some more unusual perpetual bonds do not trade. It offers no pricing analysis, market data, or comparison of yields, and does not describe particular issues or venues. Its main lesson is the distinction between a bond's lack of a maturity date and the practical possibility of an earlier call.

Key ideas

• Perpetual bonds have no contractual maturity date.
• Many recently issued perpetual bonds include issuer call rights.
• A callable perpetual can have an open-ended contractual life but a finite expected life.
• Many recent perpetual issues trade on bond exchanges, though some unusual examples do not.

Tags

# Practical applications of financial instruments with infinite lifetime


# Practical applications of financial instruments with infinite lifetime












In financial mathematics, mathematician sometimes consider financial instruments with infinite lifetime, e.g. bonds or options.

I am curious how it looks in practice. Is the case of ​​an infinite lifetime of financial instruments encountered on the real financial markets? What kind of financial instruments have this property and where we can trade them?

## Answer by Trevor Hansen (score 1)

https://quant.stackexchange.com/a/42818

The most common example of financial instruments with "infinite" lifetime are perpetual bonds (Wikipedia has details here).

Perpetual bonds do not have a contractual end date, but recent versions of these bonds are almost always callable. This means that the issuer has the right at certain points in the future to redeem the bond. A callable bond whilst having an "infinite" contractual lifetime for the issuer if the issuer so wishes has a finite expected lifetime.

Lots of recently issued perpetual bonds can be traded just like other exchange traded bonds on the usual exchanges. See the Wikipedia article for some more exotic examples of perpetual bonds which do not trade.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.