Perpetual bonds offer higher coupon but carry recall risk | Business Standard

Perpetual bonds offer higher coupon but carry recall risk

Sanjay Kumar Singh | New Delhi Sep 15, 2016 01:19 PM IST
Perpetual bonds offered by public-sector banks are a good option for retail investors, especially retirees, who want to lock into the current rates for a very long tenure and want to avoid reinvestment risk, which they would face in shorter-tenure fixed-income instruments (in a falling rate scenario).  

Before investing, check out the coupon rate offered by these bonds. Buy them if their post-tax return is better than on other long-term options like NCDs and tax-free bonds (the yield in the secondary market, since fresh issues have not been coming).  

Investors should also be aware of the risks in these bonds. The first pertains to the 'call' option. The issuer retains the right to recall these bonds after a fixed period, say, five years. If interest rates within the economy have fallen by then, it is in the interest of the investor to retain these bonds. The issuer could at such a point recall these bonds and issue a new set at a lower coupon rate. "In this respect, tax-free bonds, which come without a call option, are a better option," says Manoj Nagpal, chief executive officer, Outlook Asia Capital. But the interest rate on tax-free bonds is lower than on perpetual bonds, so there is a trade-off.    

The second risk pertains to liquidity. Investors can't sell these bonds back to the issuer in case they want their money back. They will have to sell them in the secondary market, where liquidity is likely to be poor.    

Only those who need a regular income but don't need liquidity should invest in these bonds

ALSO READ: SBI set to launch foreign AT1 bonds on Wednesday

Read More on  Perpetual bonds | public sector banks | call option | 
reinvestment risk | liquidity


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