Law Of Perpetuity
Perpetuity refers to something which is unending or perpetual. In financial terms, an annuity, wherein periodic payments start on a particular date and then continue indefinitely thereafter, can be referred to as ‘perpetuity’. For instance, fixed coupon payment made on funds that are permanently invested can be called ‘perpetuity’. Another good example of perpetuity would be a scholarship that is paid indefinitely from endowments. |
Sponsored Links :
|
Law of Perpetuity is one among the major principles of corporate finance. According to it, perpetuity’s present value can be calculated using a simple formula, as elucidated below.
Consider an endowment, which being a form of perpetuity, releases $2,000 every year. Also, assume the bank’s interest rate to be three per cent. The present value of this endowment can now be calculated by dividing the total annual payment by the interest rate. Accordingly, the present value (PV) equals to $66,666. (E.g. PV = $2000/0.03 = $66,666). Thus, according to the law of perpetuity, if the amount of $66,666 is deposited with a bank, it would earn an interest of $2,000 every year from the endowment.
Another important thing to be kept in mind when considering perpetuity is that any future interest can be considered valid only if it is proven that it shall essentially vest within a period of 21 years from the creation of the interest. This law is undeniably an obvious expression of common law’s abomination of uncertain things. It, in fact, limits the time duration of the legal documents that divide rights of property in perpetuity. The law requires the property to be entirely owned by only one person. It will put up with provisional contingent interests only for certain time, which is not more than twenty-one years after the person’s death or from the time the documentation was put into effect.
More Articles :
|
