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Financial - Investing
Friday, 26 September 2008 14:19
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Value or Yield of a Perpetual Bond
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Value of a Perpetual Bond

A perpetual bond is a bond that only pays interest, and the principal amount is never paid back.

Use the Annuity Calculator to compute the value of a perpetual bond. Suppose the bond pays 80 dollar per year and the yield on competing instruments is 5%. Enter the following into the calculator and click Compute for the value of this perpetual bond:

FieldValueRemark
Present ValueLeave this field empty to indicate that it needs to be computed.
Interest (%)5Yearly yield on competing instruments.
Initial term amount80 per yearThis is the cash flow the perpetual bond generates.
Number of terms0Entering zero here tells the calculator to compute with an infinite number of terms.
Indexation (%)0The amount the bond pays stays the same over the years.

It could be that the first coupon payment is less than one term away. In that case you should use the bond calculator. The Maturity Date can be chosen at most 500 terms later than the Computation Date. Suppose the Computation Date is on May 7, 2009 and the interest is paid each first of January, then enter the following into the bond calculator for the price of this perpetual bond:

FieldValueRemark
Nominal interest8Combined with the field Nominal Value this tells the calculator that this bond pays $ 80 each year.
Coupon period12 months
Date computation2009-05-07Date format YYYY-MM-dd
Maturity Date2509-01-01The maturity date should be as far away as possible. It must be on a January 1 to indicate that the coupons are paid every first of January.
Interest in advance or afterwardsafterwardsThis is most common.
Nominal value1000Combined with the field Nominal Interest this tells the calculator that this bond pays $ 80 each year.
Compute Yield to Maturity or ValueValue
Yield to Maturity5Yearly yield on competing instruments.

The result will appear in the field Present value coupons.