Perpetual bonds are fixed income instruments without defined maturity dates. 

Most fixed income instruments pay a fixed interest rate to the holder until a specified date, and principal is then returned. 

With a perpetual bond, the return of principal is not automatic. 

These instruments are often treated as equity because they will make payments forever.

A perpetual bond is similar to a very low volatility stock that pays a dividend. 

The downside is that you cannot simply hold one of these bonds until maturity in hopes of receiving a lump sum payment; if the bond falls in value, you must sell it in the open market.

Most perpetual bonds are callable by the issuer: although you will receive interest payments for as long as you hold a bond of this type, the issuer may decide to retire the debt by calling the bond and returning the principal. 

There is no specified date when this must happen, but after an initial non-callable period (often 5 years), the issuer may call the bond at its discretion. 

This means that by holding a perpetual bond, you also face reinvestment risk because the bond is likely to be called only if rates fall.

How It Works/Example:

A company may issue a perpetual bond which offers a coupon payment forever, at least theoretically. The issuer does not have to redeem perpetual bonds, but is responsible for coupon payments.  

Perpetual bonds are used as a source of subordinated debt. Since it does not have to be repaid, it is considered a source of Tier 1 capital (i.e. equity capital and disclosed reserves) for banks. 

For banks, perpetual bonds help to fulfill the bank's capital reserve requirements. Even though they are technically a form of debt, they qualify as "equity" on the bank balance sheet. 

Although there is usually no set maturity date, perpetual bonds may be structured to allow the bonds to be callable after a set period of time, usually between 5 and 10 years. 

This is especially important if the interest rates fall sharply and the issuer needs to reduce the interest cost.

Why It Matters:

Historically, perpetual bonds have paid a higher than normal yield on comparable debt quality. As a result, in a competitive market, they are an attractive source of capital, but does offer Risk as with any investment.