Irredeemable security

3 key takeaways

• Irredeemable securities, also known as perpetual bonds or perpetual securities, do not have a set maturity date, allowing them to remain outstanding indefinitely.
• These securities typically pay a fixed interest rate to investors, providing a steady income stream over time.
• They are used by issuers to raise long-term capital without the obligation of repayment at a specific date, offering stability to both the issuer and the investor.

What is an irredeemable security?

An irredeemable security is a financial instrument that does not have a maturity date. This means the principal amount of the security is not scheduled for repayment by the issuer. Instead, these securities are designed to pay interest to investors indefinitely. Common types of irredeemable securities include perpetual bonds and some types of preferred stocks.

Irredeemable securities are attractive to investors seeking long-term, stable income and to issuers looking to raise permanent capital without the pressure of refinancing or repayment obligations.

Characteristics of irredeemable securities

• No maturity date: These securities do not have a set date for the repayment of the principal amount.
• Fixed interest payments: Investors receive regular interest payments, often at a fixed rate, for as long as they hold the security.
• Perpetual nature: The security remains outstanding indefinitely, unless the issuer decides to repurchase it, typically at a premium.
• Lower price volatility: The absence of a maturity date can lead to lower price volatility compared to securities with finite terms.

Benefits of irredeemable securities

For investors

• Steady income stream: Investors receive regular interest payments, providing a reliable source of income.
• Lower reinvestment risk: Since there is no maturity date, investors do not face the risk of having to reinvest principal at potentially lower interest rates.
• Portfolio diversification: Irredeemable securities can diversify an investment portfolio by adding a long-term, stable income component.

For issuers

• Permanent capital: Issuers can raise long-term capital without the obligation to repay the principal, providing financial stability.
• Interest expense: Interest payments on irredeemable securities can be tax-deductible for the issuer.
• Flexibility: Issuers have the option to repurchase the securities if they choose, typically at a predetermined price.

Drawbacks of irredeemable securities

For investors

• Interest rate risk: If interest rates rise, the fixed payments from irredeemable securities may become less attractive compared to newer issues offering higher rates.
• Inflation risk: Fixed interest payments may lose purchasing power over time due to inflation.
• Liquidity risk: Irredeemable securities may be less liquid than other types of bonds, making them harder to sell in the secondary market.

For issuers

• Perpetual obligation: Issuers must continue making interest payments indefinitely, which can be burdensome during financial downturns.
• Higher interest rates: To compensate for the perpetual nature and associated risks, issuers may need to offer higher interest rates compared to term bonds.

Examples of irredeemable securities

• Perpetual bonds: Also known as consols, these are bonds that pay interest indefinitely without a maturity date. They were historically issued by governments but are now also issued by corporations.
• Perpetual preferred stock: A type of preferred stock that does not have a maturity date and pays dividends indefinitely. These stocks typically have higher dividend yields to compensate for their perpetual nature.

Related topics

• Perpetual bonds: Explore the characteristics, benefits, and risks of perpetual bonds in more detail.
• Preferred stock: Understand the features of preferred stock, including dividend payments and their place in a company’s capital structure.
• Fixed income securities: Learn about various types of fixed income securities, including bonds and debentures, and their roles in an investment portfolio.

Consider exploring these related topics to gain a deeper understanding of irredeemable securities and their place within the broader spectrum of financial instruments and investment strategies.