Consol Bond: All About Consol Bond, Its Merits & Demerits

Consol Bond: All about Consol Bond, Its Merits & Demerits

A Consol Bond or Perpetual bond is fixed security with no maturity date. It is often considered as equity rather than debt, and they are not redeemable.

In simple words, the perpetual bonds cannot be redeemable & the issuer will pay the interest continuously but these come with a call option by the issuer. The issuers are big manufacturing companies or banks and these bonds carry credits, liquidity and the interest rate rise.

Unlike normal bond where the issuers will pay the interest irrespective of the profit/loss, the interest for perpetual bonds will be paid only if the issuers have free reserves and there is no cumulative of the interest for the next year.

First introduced in 1751 at 3.5% and have been in circulation ever since, although interest rate has varied. In 2015, the British government decided to redeem all consol in circulation.

They were issued by the bank of England and the U.S Government. The first consols were issued in 1751. They have now been fully redeemed. The U.S government consols were issued in the 1870s.

Consol bond exists within small scope of the market, this is mainly due to the fact that there are very few entities that are safe enough for investors to invest in bonds, where the principal will not be repaid.

Merits of Consol Bonds

Flexibility to Repay: they may be redeemed at the prudence of government when it wants depending on their financial position. In 2014, the British government, a century after the start of the First World War, paid out 10% of total outstanding consol bond debt. The bonds, which paid out interest of 5% were issued in 1917 as the government sought. Fascinating for Investor: A regular investor is attracted toward it as it is government-backed and pays a decent coupon rate, that’s why investors found is trustworthy, they are ready to play a safe game. Large Participation: As it is issued in very small denominations as well, so small investors can also easily invest in it. Most of the consol bonds in the U.K are owned by small investors, with over 70% holding less than 1000 euro. No restriction over its usage: the proceeds of bond could be used for everything whether it is for personal or professional.

Demerits of Consol Bonds

Rising general interest could diminish the value of the perpetual. Investors are subject to credit risk exposure. Issuers may be able to recall certain permanent bond The issuer has no choice but to keep to money with it & pay interest forever whether it needs it or not.