Question

Why would the British government (or any government) choose to issue perpetuities (consols) over other debt instruments? Also, from an investor's perspective, why would someone choose to purchase a perpetuity (consol)?

Answer 1

Solution:

A perpetual bond is a bond that has no maturity but pays a fixed income. In this bond, the principle is not paid back as there is no maturity date.

The British or any government choose to issue this because of the following reasons

• No refinancing cost
• Can have the callable option and that can benefit the issuer when interest rate changes
• The risk associated with the markets is mitigated as the maturity is forever

The following advantages an investor can have in case of this bond

• Since the interest payment is forever hence there is a regular source of income
• No reinvesting issue and higher ssafety