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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. |
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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.
The most common differences between these two instruments are elucidated as followed:
- Lifespan: The most noticeable difference is in their lifespan. While an annuity has a limited, predetermined lifespan, perpetuity features an endless span of life. In other words, annuities, which start the payment of the intervallic amount on a preset date and continue it enduringly, are called perpetuities.
- Face Value: The second point of difference between the two is with regard to the face value repayment. Typically, an issued annuity comes with a particular face value. The intervallic coupon amount of repayment is calculated as a certain percentage of this face value. An annuity that is sold at price more than its face value is considered to have been sold at premium. Similarly, annuity sold at discount is one that fetches an amount below its face value. When the annuity gets matured, this face value is paid back to investor. Perpetuity, on other hand, does not have any such face value associated with it. So, there is no question of coupon amount repayments in this case.
- Cash Flow: While an annuity offers a sure, distinct amount of cash flow for a stipulated period of time, perpetuity can just complement an already existing source of income.
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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. More..
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