An undated issue is a government bond that has no maturity date resulting in interest payments that last into perpetuity. This unique feature makes it an intriguing option within financial markets.
Key Takeaways
- An undated issue is a government bond that provides interest payments indefinitely.
- Like dividend-paying stocks, undated issues offer bondholders continuous interest payments.
- Banks count undated issues as Tier 1 capital, supporting their capital reserve requirements.
Understanding Undated Issues
The agreed-upon term for an undated issue is essentially “forever.” Since the bondholder will receive ongoing interest payments, undated issues are often comparable to dividend-paying stocks. For this reason, they are dubbed perpetual bonds or “perps.”
Although governments can redeem undated issues, the likelihood of doing so is minimal due to their typically low coupons. This characteristic positions these bonds closer to equity rather than debt. However, unlike most forms of equity, undated issues do not afford voting rights, rendering the holder unable to influence the issuing entity.
In banking, undated issues count as Tier 1 capital—which comprises equity capital and disclosed reserves—allowing banks to fulfill mandatory capital reserve requirements.
Despite their unique characteristics, undated issues are less in demand compared to more popular financial instruments such as municipal bonds or Treasury bonds.
Undated Issues in History
The concept of undated issues has historical depth, often attributed to the British government for creating or at least popularizing these financial instruments. The British introduced their first undated issues in the 18th century.
Among the most notable examples are the U.K. Government’s undated bonds, known as gilt-edged securities or simply ‘gilts.’ At their peak, there were eight different issues, some dating back to the 19th century. The War Loan, issued in the early 20th century with a £1.9 billion size and a 3.5% coupon rate, was among the largest of its time.
However, undated gilts have now faded into financial history. The last undated bonds were redeemed by the British government in July 2015, marking the end of an era.
Related Terms: perpetual bonds, dividend-paying stock, Tier 1 capital, coupons, municipal bonds, Treasury bonds, gilts.
References
- United Kingdom Debt Management Office. “About Gilts”.
