A bond that pays interest forever and has no maturity is a ...



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A bond that pays interest forever and has no maturity is a perpetual bond. In what respect is a perpetual bond similar to a no-growth common stock? Are there preferred stocks that are evaluated similarly to perpetual bonds and other preferred stocks that are more like bonds with finite lives? Explain.

A perpetual bond is similar to a no-growth stock and to a share of perpetual preferred stock in the following ways:

1. All three derive their values from a series of cash inflows—coupon payments from the perpetual bond, and dividends from both types of stock.

2. All three are assumed to have indefinite lives with no maturity value (M) for the perpetual bond and no capital gains yield for the stocks.

However, there are preferreds that have a stated maturity. In this situation, the preferred would be valued much like a bond with a stated maturity. Both derive their values from a series of cash inflows—coupon payments and a maturity value for the bond and dividends and a stock price for the preferred.

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