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In "a 10% bond", I have been told 10% means the coupon rate of the bond relative to the par value not the price when it was bought.

But in "a 10% perpetuity", there is no par value to paid at the end of the holding period, what is 10% specified with respect to?

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2 Answers 2

There is a British bond that pays interest in perpetuity, but never principal, called a consol bond.

Let's say that this consol bond was issued with a 10% coupon, of 100 pounds a year, for 1000 pounds. That ORIGINAL value would be its par value.

Let's say that today, the market interest rate has fallen to 5%. Then a consol with a 100 pound a year coupon would be worth 2000 pounds in today's market. But its PAR value would still be 1000 pounds.

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There does exists a par value for every bond, even for a perpetuity. The 10% has to be off something, the par value of the bond.

The 10% is specified with respect to the par value of the bond, and not on the amount lend by the lenders to the issuer of the bond. Perpetual bonds have a par value, which the issuer pays out as mentioned in the callable schedule when he exercises the option, callable which exists on most perpetual bonds issued, to buy back its issued bonds.

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Thanks! What is it called that the repayment of a bond at the end of its holding period besides coupon? In other words, what does a perpetuity not pay at the end of the holding period? Is it called par value? –  Tim Nov 4 '11 at 17:00
    
No when you exercise a callable option, the price paid is under a schedule. If it is exercised after 5 years you get x, if exercised after 6 years you get y and so and so forth. Sorry edited my answer which gave a different meaning altogether than what I wanted to say. The amount paid maybe nearer the par value but that depends how the issuer has decided. Theoretically there isn't a maturity date so there isn't a par value which would be repaid. –  DumbCoder Nov 4 '11 at 17:03

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