How is a Perpetual Bond Similar to a Share of Preferred Stock?
- In the hierarchy of bankruptcy claims, "perps" are just above preferred shares.Pyramides zen image by lionel VALENTI from Fotolia.com
Shares of equity, whether preferred or common, have this in common with perpetual bonds: stocks don't have a maturity date either. Another point they have in common is that shares of equity are subordinate to bonds in the event of bankruptcy or liquidation; perpetual bonds---though in a position prior to that equity---are subordinate to all other bonds. - For banks such as HSBC, one attraction of such bonds is that their proceeds are considered "tier 1 capital," like those of the sale of stock. This means that perpetual bonds help banks satisfy regulatory requirements.
- It would be a misconception to think, though, that perpetual bonds are just equity under another name, as the contractual rate of interest for the bonds is fixed. For a stock, there is no mandatory rate of (dividend) payments at all.
