Perpetual Bond

Full form: AT1 Bond

Investments

Perpetual bonds (called AT1 or Additional Tier 1 bonds in banking) have no maturity date -- they pay interest indefinitely. Banks issue AT1 bonds to meet capital adequacy requirements. They can be written off by RBI if the bank faces financial stress.

In detail

AT1 bond risks for retail investors:n2021 YES Bank and other AT1 bonds: RBI allowed banks to write off AT1 bonds to save themselves. Retail investors who bought YES Bank AT1 bonds (6,000+ investors) lost Rs 8,000 Cr. Supreme Court later ordered partial recovery, but the risk was real.nnSebi restrictions (2022): AT1 bonds can only be sold to institutions and very high net worth individuals. Minimum face value: Rs 1 Cr per instrument. Mutual funds restricted in AT1 bond exposure.nnFor retail investors: AT1/perpetual bonds are NOT suitable. The theoretical perpetual interest looks attractive but default/write-off risk is severe.

Formula

AT1 bond yield = Base rate + Risk spreadnRisk: can be written to zero by RBI in bank stress scenario

Real-life example

🇮🇳 India example

An NBFC offers "perpetual bonds" at 11% to retail investors via a distributor. Meena invests Rs 5L attracted by the high rate. 2 years later: NBFC faces liquidity crisis, RBI triggers write-off of AT1 bonds. Meena loses Rs 5L (100% loss). The 11% seemed attractive but was actually compensating for extreme default risk she did not understand.

Frequently asked questions

Are all high-interest bonds dangerous? ▼

High yield = high risk. Always ask: WHY is this paying more than a bank FD or AAA-rated bond? Extra yield compensates for extra risk. AT1 bonds, high-yield corporate bonds, NCDs from low-rated companies -- these carry genuine default risk. Stick to AAA-rated bonds and bank FDs for safety.