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Meaning Of Perpetuity
Perpetuity means a thing that has no ending and is permanent or perpetual in nature. Talking in financial terms, perpetuity can be defined as an annuity, wherein the intervallic payments start on a pre-specified date to continue ad infinitum thereafter. For example, fixed-coupon payment made on an amount that has been enduringly invested can be termed as ‘perpetuity’. |
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Another simple example of perpetuity is a scholarship paid from endowments for an indefinite period of time. Thus, annuities with no specified end or the cash payments, which continue everlastingly for the foreseeable future, are nothing but perpetuities.
Only a few real perpetuities actually exist in practice. Preferred and real estate stocks are good examples of these. The methodologies that are used to assess the present value of perpetuity are typically applied to determine price. Thus, perpetuity is just another shortcut method to value the financial assets, under the principle of time value of money. In valuation, this basic concept of perpetuity is closely associated with the terminal value and the terminal rate of growth.
Perpetuity’s present value (PV) can be determined by simply dividing the total periodic payment amount (A) by the discount rate (R). That is, PV = A/R. As is clear from the calculation, perpetuity has a finite value owing to the fact that the cash flow anticipated in distant future does not have a very high present value. Thus, perpetuity’s price is nothing more than a fixed coupon amount paid over a pre-established yield or discount rate. An essential fundamental that one should bear in mind with regard to perpetuity is that any future interest can become invalid if it is not proven that it shall effectively vest within 21 years from the creation of the interest, that is, after the death of the person concerned.
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What Is The Difference Between Annuity And Perpetuity In Corporate Finance ?
 In corporate finance, financial assets can be valued, as per the rule of time value of money, using the basic concepts of perpetuity and annuity. Both are kinds of payment schedules that are most commonly used for debt settlement. They require the debt payments to be made periodically, at expected intervals of time. Most often, it is the corporations and banks that issue these schedules for use by various parties. Thus, there are many similarities between the two. However, perpetuity differs from annuity in various other aspects. More..
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