State banks generally issue Additional Tier 1 bonds (AT-1) bonds to shore up their core or Tier-1 capital. Unlike traditional bonds, they have few key features which make them different. The first feature is that these bonds carry no maturity date and hence are also known as perpetual bonds. AT1 bonds carry a call option of 5 years and 10 years. Secondly, banks issuing AT-1 bonds can skip interest payments if the bank's capital falls below the regulatory requirement at the time when interest is due, this way the bank will not be at a risk of default. Third, if a bank is unsteady and needs rescuing, the RBI can anytime ask the bank to cancel its AT1 bonds without informing the investors.

These bonds offer a high interest rate but carry considerable risk and hence should only be opted by investors with high risk-appetite. AT-1 bonds are subordinate to all other debt and only senior to common equity. This means, these bond holders fall far behind in the pecking order in which investors are paid in case the bank becomes insolvent. Given the higher risk, the rating for these bonds maybe lower than Tier - II bonds of the same issuer.

For eg: As per reports, government-owned Punjab National Bank sometime in January had issued and allotted Rs 495 crore Additional Tier-1 capital bonds at a coupon of 8.6 % per annum.

Key features of Additional Tier-1 bonds

1) These have higher rates than tier-II bonds.

2) No maturity date.

3) The issuing bank has the option to call back the bonds or repay the principal after a specified period of time.

4) Higher yield than secured bonds issued by the same entity.

5) Individual investors too can hold these bonds, but mostly high net worth individuals (HNIs) opt for much higher risk, higher-yield investments.

6) Given the higher risk, the rating for these bonds are at times lower than Tier - II bonds of the same issuer.