On this web page we look at the definition of perpetual bonds, and formula for valuation of perpetual bond illustrated with an example.
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How do you define a Perpetual Bond?
Perpetual Bond is a unique class of bonds that never matures. These are indeed rare but they help illustrate the valuation technique in its simplest form. The present value of the perpetual bond would simply be equal to the capitalized value of an infinite stream if interest payments. If a bond promises a fixed annual payment INT forever, its present value V at the investor's required rate of return for this debt issue is Kd.
What is the formula for Valuation of Perpetual Bond?
Thus the present value of a perpetual bond is simply the periodic interest payment divided by the appropriate discount rate per period. Suppose you could buy a bond that paid $75 a year forever. Assuming that your required rate of return for this type of bond is 10%, then the present value of this security would be