Answer: Irredeemable
bonds or perpetual bonds
Bonds
which will never mature are known as irredeemable or perpetual bonds. Indian
Companies Act restricts the issue of such bonds and therefore, these are very
rarely issued by corporates these days. In case of these bonds, the terminal
value or maturity value does not exist because they are not redeemable. The
face value is known, and the interest received on such bonds is constant and
received at regular intervals and hence, the interest receipt resembles
perpetuity. The present value is calculated as:
Where Vo is the present value; ‘I’ is the annual interest payable on the
bond and ‘’ is the required rate of interest.
If
a company offers to pay Rs. 70 as interest on a bond of Rs. 1000 per value and
the current yield is 8%, the value of the bond is 70/0.08 which is equal to Rs.
875.