Why Perpetual Bonds Can Behave Differently from Fixed Deposits

The rate that made Lakshmi look twice

Somebody offered Lakshmi a bond from a large, familiar bank paying appreciably more than her deposits. It pays interest on a schedule. It has a date a few years out at which, she was told, the bank would repay her.

Every part of that description is either true or nearly true, and the instrument is not remotely what she understood it to be.

Its defining feature is that there is no maturity. A conventional bond returns your principal on a stated date, and that date is what makes it comparable to a deposit — you know when you get your money back. A perpetual bond has no such date. The issuer pays interest indefinitely and is never obliged to repay the principal, so Lakshmi's money comes back only if the issuer chooses to redeem, or if she sells to somebody else at whatever price the market offers.

She is not lending for a term; she is buying a stream of payments with no promised return of capital. Every other risk below follows from that.

Why the coupon is high

Perpetual bonds pay noticeably more than deposits and more than ordinary bonds from the same issuer, and that difference is payment for a specific set of things.

There is no repayment obligation, so she cannot demand her money back, ever. These instruments typically rank low in the creditor queue, with depositors and senior lenders paid first and holders of subordinated instruments well behind them. Interest can usually be skipped: many perpetual instruments, particularly those issued by banks to meet capital requirements, permit the issuer to omit a coupon in defined circumstances — often without that omission being an event of default, and often without the missed payment ever being made up.

Some bank-issued perpetual instruments are explicitly designed to absorb losses when the issuer is in difficulty, which can mean the principal is written down or converted while the bank continues operating. This is the feature most at odds with how they are commonly sold, and internationally it is the one that has produced the sharpest surprises for holders.

And with no maturity the cash flows stretch out indefinitely, which makes duration very long and prices capable of moving a great deal when rates change.

Every one of those is a reason the coupon is what it is, and not one of them applies to a bank deposit.

The call date is not a maturity date

Perpetual bonds usually carry a call option letting the issuer redeem after some years, and in practice issuers have often called at the first opportunity — so the market grew used to treating the call date as though it were a maturity. That is the date Lakshmi was told about.

It is not a maturity. The option belongs to the issuer and is exercised when it suits them, which means when refinancing is cheap. If conditions are poor, or the issuer is under stress, the rational choice is not to call. So the instrument extends precisely when you would most want your money back.

This is the general shape of every option held by the other side: it gets exercised against your interests, because that is what makes it worth having. Anybody pricing a perpetual bond as though it matures at the call date is assuming a decision that belongs to somebody else.

Why the deposit comparison misleads

These are frequently offered to individual investors alongside deposits, with the coupon as the headline, and the comparison does not survive contact with the terms.

A deposit is a bank's obligation to repay a known amount on a known date, insured up to the deposit insurance limit, with no market price. A perpetual bond has no repayment date, no insurance, a market price that can fall substantially, a coupon the issuer may be permitted to skip, a low position in the creditor queue, and — for bank capital instruments — an explicit role in absorbing losses if the issuer gets into difficulty.

The higher coupon is not a better deal for the same risk. It is the price of a materially different arrangement, priced roughly correctly by professional investors who understand the terms.

The liquidity problem

Selling before the issuer redeems means finding a buyer, and these instruments often trade thinly, so exit prices can be poor and in stressed conditions buyers may be scarce exactly when holders want out.

That combination — no repayment obligation and limited liquidity — means the realistic answer to "how do I get my money back?" may be "when the issuer decides, or at a price you would not like".

What to establish before buying one

If you are considering one, these are not optional. What exactly is the instrument, and is it a regulatory capital instrument for a bank? Where does it rank if the issuer fails? Under what circumstances can the coupon be skipped, and is a skipped coupon ever paid later? Can the principal be written down or converted, and on what trigger? What is the call structure, and what happens if the issuer does not call? What is the realistic market for selling it before then?

And how does the yield compare with senior debt from the same issuer? That difference is the market's price for everything above, and it tells you how much risk you are being paid to take.

If any of those cannot be answered from the offer document, that is the answer.

What evidence would settle the general question

An honest limitation: this page explains the mechanism and does not show how Indian perpetual instruments have actually behaved — how often calls were skipped, how prices moved during stress, what holders recovered in the cases that went wrong.

Doing that would need issue-level price and event history for Indian perpetual instruments, which this repository does not hold and which DATA-REQUIREMENTS.md lists among the data we lack. Until it exists, this article describes the terms and the incentives rather than putting figures on outcomes, because an invented frequency would be worse than none.

What to take away

A perpetual bond is not a deposit with a better rate. It has no repayment date, ranks low in the creditor queue, may permit the issuer to skip interest, may be written down while the issuer continues operating, and can be very sensitive to interest rates.

The call date is the issuer's option rather than your maturity, and it will not be exercised when conditions are bad. The extra coupon is the price of all of that. If you cannot answer where you rank, when the coupon can be skipped and what triggers a write-down, the instrument is not yet assessable — and for money that is meant to be safe, it is the wrong instrument regardless.