Perpetual Bonds: Bonds that make Apple, Google, and Banco do Brasil pay interest forever

The fixed income market in the United States is the largest on the planet and offers products that do not yet exist in Brazil. There are among them bonds perpetual (or perpetual bonds), fixed income securities that have no maturity date and pay an annual fee to investors – forever.

There are documents issued by several companies, foreign, for example big tech Apple and Alphabet (owner of Google), or Brazilian companies such as Banco do Brasil.

According to experts, high interest rates around the world create a favorable scenario for these investments. However, they are not recommended for any investor because anyone betting on them should take a number of precautions.

“Os bonds continuous are a reflection of predictability and confidence in the United States as a market,” emphasizes Neela Galvani, portfolio manager at TM3 Capital.

assistant bonds Perpetuities are fixed income instruments but function like stocks. Instead of getting back the invested amount with interest on the maturity date, the investor gets a return proportional to the invested amount. In addition, bond prices vary with market and company conditions, just like stocks on the stock exchange.

An advantage for the company bonds perpetual debt is about getting cash flow with predictable and lasting debt. And if the market or timing is right for the company, it can buy back the bonds — as BB did this week.

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But should you invest in paper that lasts forever? What are the associated risks? And does it make sense for a Brazilian investor? Check out the answers below.

It’s worth investing in bonds indefinite – and how much do they pay?

For Galvani, “the current moment is favorable for investment bonds, especially longer ones (for example, eternal ones)”. He explains that, looking at interest rates, there is a risk that rates will rise more than market prices, but the impact of this scenario, which is considered unlikely, will be small.

“We’re unlikely to see the kind of rise in interest rates that we’ve had over the last 18 months,” he says. Therefore, the salary level may now be close to the ceiling.

Because they are considered more risky – after all, you have to have the guts to carry the title for so long – bonds Perpetual bonds have a higher yield compared to other fixed income securities. Today, you can find securities that yield more than 9% per year.

There are even Brazilian companies in this market. In 2018, Itaú issued US$750 million bonds perpetual with annual returns 6.5%. Banco do Brasil has two securities in the market: one with an annual yield 4.62% and another with a bet 6.25%.

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Today, the return on securities is considered the safest with fixed income Treasury, close to 5%, which is a higher level than many bonds a perpetual offering. Thus, Art bonds newer ones are more attractive as they are issued at high interest rates and give the investor the opportunity to lock in high returns for a long period.

See reward that some bonds they will pay forever in dollars:

Emission companyAnnual Award (in %)
Alphabet1.98
an apple4.85
Bank of Brazil4.62 and 6.25
GM6,12
Itau6.5
JP Morgan4.32
Microsoft4

Font: Bondsupermart

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What to consider when buying

1. Date of issue

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Because they are very long bonds Perpetual bonds go through different interest rate scenarios, so they can pay less than safer bonds. When Itaú released its communication with no maturity date, five years ago US interest rates were below 2% per year. Today, the paper pays less than US Treasuries.

“In the short term, there could be a mark-to-market loss (if the investor decides to sell the paper),” explains Daniel Leal, fixed income strategist at BGC Liquidez. However, he believes that interest rates have never been higher.

However, there is a caveat when choosing between new and old securities: “fresher securities may carry more risk related to the financial stability of the company, while older securities already have a history of payments and are usually less volatile,” explains Fabricio Gonçalves, CEO of Box Asset Management.

2. Liquidity

New or old, one of the big risks associated with bonds continuous is liquidity. “It’s a paper with a lot of features that is less traded in the secondary market, which attracts a smaller audience,” says BGC’s Leal.

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3. Volatility

In addition, the volatility of these bonds higher than other private debt securities, as any sign of rising interest rates could affect the opportunity cost of these securities.

4. Risk of default

The owners of these bonds They are the last in line to pay when the company has financial problems. So, you have to choose well.

As in the case of any other private credit security, companies with a higher level of reliability pay lower rates, while higher returns are offered by smaller companies or even those with financial problems. So this is important to consider when dealing with very high stakes.

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Daniel Leal recommends buying shares from solid companies that have good projects: “you can’t buy from anyone, you need to choose companies that have the prospect of longevity.”

Who are they recommended for?

Fixed-maturity bonds are recommended for investors who want to turn their assets into income. In this regard, they can function as reserve funds.

It is still necessary to consider the level of risk that the investor is taking on in the portfolio. Those who are more conservative may not get along with them bonds, as there are no guarantees that the company will live “forever”.

How to invest

To invest in bonds, It is necessary to have an account with an international broker. It is also necessary to take into account that investments in a private loan, as in other assets abroad, usually have a minimum cost – with some brokers, investments start from 1000 US dollars.

Interest payments received from bonds open-ended loans are subject to a progressive income tax table. The declaration must be made monthly and the tax charged varies according to the amount of profit for the period, with rates ranging from 15% (for profits up to R$ 5 million) and 22.5% (for volumes over 30 million R$).

When securities are bought back (sold), the capital gains tax is also applied to the difference between the purchase price and the liquidation of assets according to the same table – with the advantage of exemption for amounts up to R$ 35 thousand per month, which does not apply to interest payments ( coupons).

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