What is an undated issue?
A government bond with an undated issuance has perpetual interest payments as it has no maturity date.
Recognizing the Undated Issue
In technical terms, “forever” is the predetermined, agreed-upon duration for which interest on an undated issuance will be paid. From the bond holder’s point of view, an updated issuance may operate similarly to a dividend-paying stock since the holder will continue to receive interest payments on a periodic, continuous basis for an extended length of time. Updated offerings are commonly referred to as perpetual bonds, or just “perps” for short, for obvious reasons.
Although the government can redeem an undated issuance, it is often not inclined to do so. Due to low coupons, redeeming is discouraged or nonexistent in most current updated issues. Because undated issues are eternal, they are not recognized as debt but as equity. However, these bonds differ from other types of equity in that the holder has no voting-related influence or control over the issuing corporation since a matching vote does not accompany them.
Banks categorize undated issues as Tier 1 capital, including stated reserves and equity capital. Banks may utilize these bonds to meet their capital reserve requirements.
In the present financial environment, dated issues are still available, although they are less prevalent than financial products like Treasury or municipal bonds.
Updated Historical Concerns
Updated publications have been in existence for a while. Several financial historians attribute the invention of the idea, or at least the introduction of the earliest publicly known instances, to the British government. Financial experts first noticed the British issuing of undated issues in the 18th century.
The U.K. Government’s undated bonds, or gilts—or gilt-edged securities—are perhaps the most well-known examples of updated offerings. Eight issues existed until very recently, some of which date back to the 19th century. The greatest of these offerings to date was the War Loan, issued in the early 20th century with a coupon rate of 3.5 percent and an issue size of £1.9 billion. But in the U.K., undated gilts are increasingly associated with financial nostalgia. In July 2015, the U.K. portfolio’s last updated bonds were redeemed as part of a scheme started by the chancellor of Britain.
Conclusion
- A government bond with an undated issuance has perpetual interest payments as it has no maturity date.
- From the bondholder’s point of view, an updated issuance may operate similarly to a dividend-paying stock.
- Since updated offerings assist banks in meeting their capital reserve requirements, banks see them as a kind of Tier 1 capital.
