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Perpetual bonds
07 Apr 2022 (163 views)  

Dear Mr. Tan, 
With interest rates rising to curb inflation, I am concerned about the debt-ratio of companies. Due to low interests, many investors are driven to buy perpetual bonds which pays higher interest. Some companies issue many perpetual bonds.

Is this because perpetual bonds are not reflected in their debt ratios since it is not exactly a loan since theoretically it does not have to be repaid and so their balance sheet still looks good? I would like to know this before I buy another perpetual bond for its more attractive interest rate. 

REPLY 
You can read more about perpetual bonds in this webpage.

The key features of a perpetual bond are:

- It pays a fixed interest rate
- It does not have a redemption date, and is not counted in the debt ratio
- It still carries a risk of non-repayment, if the company is not able to pay the interest
- On winding up of the company, it is paid before ordinary shares, but may still face the risk of not being fully redeemed.
- While the fixed interest may look attractive now (when interest rate is low), it will not be attractive when interest rate rises in the future. 

I prefer to invest in ordinary shares of good companies which pays a good dividend rate.

Tan Kin Lian


 


Perpetual bonds
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Dear Mr. Tan, 
With interest rates rising to curb inflation, I am concerned about the debt-ratio of companies. Due to low interests, many investors are driven to buy perpetual bonds which pays higher interest. Some companies issue many perpetual bonds.

Is this because perpetual bonds are not reflected in their debt ratios since it is not exactly a loan since theoretically it does not have to be repaid and so their balance sheet still looks good? I would like to know this before I buy another perpetual bond for its more attractive interest rate. 

REPLY 
You can read more about perpetual bonds in this webpage.

The key features of a perpetual bond are:

- It pays a fixed interest rate
- It does not have a redemption date, and is not counted in the debt ratio
- It still carries a risk of non-repayment, if the company is not able to pay the interest
- On winding up of the company, it is paid before ordinary shares, but may still face the risk of not being fully redeemed.
- While the fixed interest may look attractive now (when interest rate is low), it will not be attractive when interest rate rises in the future. 

I prefer to invest in ordinary shares of good companies which pays a good dividend rate.

Tan Kin Lian