Whenever, your friend borrow from you, he must always be committing to you that he will repay after certain time period lets say after two weeks or after One month. Similarly, in normal circumstances, whenever Government borrows money from Banks, Financial Institutions, Public, etc. Government also commit at the time of borrowing that it will repay the loan lets say after 90 days or after 35 Years or any other time period, also called maturity period in financial parlance.
However, Consol Bond is just opposite of it, in this type of Bonds, Government does not commit the time period when it will repay the loan. So it is also termed as an example of Perpetual Bonds (which is not repayable). But here one important point to be noted that Government has the option to repay the Consol Bond when its financial position improves. Therefore, it can not be called Perpetual Bond in true sense.
Features of Consol Bond
Consol Bonds have no maturity, so investor do not have right to demand repayment of loan from Govt.
It has Fixed Coupon Rate i.e. Fixed Interest Rate payable after fixed time interval as being decided at the time of Issue of Bonds. (For instance interest may be payable on yearly basis or quarterly basis).
Government has the option to repay the Loan whenever its Financial Position Improves.
It is generally issued in exceptional circumstances when Government needs Huge Money and has no confidence over its finances that it will be able to repay with certainty in time to come.
History of Consol Bond
First Time, Consol Bonds were issued in 1751 as per Wikipedia. However, significant amounts were raised during First World War in 1917 as National War Bonds by UK. These Bonds have finally been redeemed by UK Government in 2014-15 say just after 100 years.
Why Investors will Invest in Consol Bond
It is a genuine question which comes to the mind that why an investor will invest in a Bond which has no maturity. So, here is list of reasons for investment in these Bonds:
Government may provide Tax Incentives to citizens.
In the time when interest rates are falling on Fixed Deposits, it will give assured return to investors especially to senior citizens who are dependent on interest income.
As Borrower is Government, there is no risk of default.
Possible MCQ Statements on Consol Bonds
It is a perpetual Bond: False, as it is redeemable at the option of Government.
Consol Bond does not have Maturity Period: True
It will decrease the Fiscal Deficit: False, it is just funding method of Fiscal Deficit (Total Expenditure-Total Receipts (other than Loans). It has no impact on Fiscal deficit.
Interest is also Not Payable on Consol Bond: False.
Investors can not ask for redemption of Consol Bond: True
Does Government has power to make it mandatory for citizens or class of citizens to invest: Yes, possible may be through Law.
In this Tough Period of Covid-19, when Revenue of Government is falling and expenditure, to tackle the pandemic and to boost up the economy, is increasing significantly, Government may resort to extra ordinary solutions for funding its expenditure needs. In this regard, one option available with Government is issue of Consol Bonds.
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Source: The Hindu, Wikipedia, Other Internet Sources.