Definition of Perpetual Subordinated loans
Perpetual subordinated loan is a type of Junior debt that continues indefinitely and has no maturity date. Perpetual subordinated loans pay creditors a steady stream of interest forever. Because the loan is perpetual, the principal is not repaid, so the interest a couple never ends. In fact, the borrower pays the interest as a fee for the access to money but never repays the principal. The interest rate is dependent on the credit rating of the borrower and market interest rates.
Breaking down the ‘perpetual Subordinated loan’
As perpetual subordinated loans is a type of Junior debt, they are relatively risky for the lender. They are secondary in relation to the subordinated loans (credits), so if the borrower a perpetual subordinated loan defaults the lender is not repaid until the senior loans of the borrower not repaid. Because of the increased risk associated with subordinated loans, they will have a higher rate of interest relative to the subordinated loans. Lenders can use the present value calculation to determine the present value of future perpetual subordinated loans.