Perpetual debenture is also called the perpetual bond or simply Prep. It is defined as the bond with no maturity date. Therefore it is advised to be treated as the equity and not as the debt. The issuers of this bond pay coupons on the perpetual bonds for ever. In this way these people have to redeem the principal. It is due to the same reason that the phenomenon of cash flows of the perpetual bond is known as perpetuity.
Examples of perpetual debenture
There are some very obvious examples of the perpetual debenture. The most obvious example of the perpetual debenture is the consols and these consols are issued by the government of UK. Most of the perpetual debentures which are issued these days are the deeply substituted bonds and debentures. These debentures are issued by the banks. These deeply substituted debentures are counted as Tier 1capitals. Most of the debentures and bond of these issues are callable and the first ever call does not come less than five years from the original date of issue. This period for which the debentures are called is called as the protection period.
There are many ratings involved with the perpetual debentures. Among these the most important ones are the Fitch ratings. These ratings are considered as warnings on the preps. In this way it becomes the hybrid instrument which is meant for blending of the features of debt and equity. The perpetual debenture is floated by several banks and leading companies. They say that there is a higher risk and also involves various other debt obligations.
Maturity of perpetual debenture
In principal there is no defined maturity of the perpetual debenture. Perpetual debentures have no defined maturity compared with the traditional bond which has a set maturity. There are separate clauses set in the agreement in order to define the limits of maturity of the perpetual debenture. In this regard the issuer may also have the discretion related to deference of the payouts of coupons. The entire basis for these debenture statements is laying on the pre-defined clauses.
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