Perpetuities

An annuity that is determined to have no certain end is called perpetuity. Perpetuities also applied to continuous cash payment that could extend to a lifetime. At this time, only a few perpetuities exist. For some time, the British government has been issuing perpetuities, which are called and traded as consols. Some investments are considered perpetuities, like the common stock and the real estate. For these investments, the same techniques for valuing perpetuities may be applied to determine their price. Perpetuities are considered to be one of the methods for the time value of money that is being used in the appraisal of value of the financial assets.

Possessing perpetuity means having an asset that gives payments that occur at specific periods that begin on a certain date and continuous indefinitely. Another term for perpetuity is perpetual annuity. A good example of perpetuity is the fixed coupon payment that is received for an irredeemable investment. Another example of perpetuity is a scholarship that is being paid from an endowment.

To determine the value of perpetuity, the formula PV = A/r is used; where PV stands for the Present Value of Perpetuity, A is the amount of payment received every period, and r is the yield (the discount rate or the interest rate). To give a concrete example, a war loan of 3% given by the British government in 6% yield environment may be traded at 50 pence for every pound. If the yield environment is at 3%, then the value will be the same for every pound.