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    Perpetuities - Bappy

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    sajjadbappy70
    A perpetuity is an annuity with infinite cash flows. It provides continual annual cash flows that never end. The present value of a perpetuity can be easily calculated using the formula PV=C/r, where PV is the present value, C is the annual cash flow, and r is the interest rate. However, the future value of a perpetuity cannot be calculated because it continues indefinitely into the future.

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    Perpetuities - Bappy

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    sajjadbappy70
    37 views12 pages
    A perpetuity is an annuity with infinite cash flows. It provides continual annual cash flows that never end. The present value of a perpetuity can be easily calculated using the formula PV=C/r, where PV is the present value, C is the annual cash flow, and r is the interest rate. However, the future value of a perpetuity cannot be calculated because it continues indefinitely into the future.

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    A perpetuity is an annuity with infinite cash flows. It provides continual annual cash flows that never end. The present value of a perpetuity can be easily calculated using the formula PV=C/r, where PV is the present value, C is the annual cash flow, and r is the interest rate. However, the future value of a perpetuity cannot be calculated because it continues indefinitely into the future.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    37 views12 pages

    Perpetuities - Bappy

    Uploaded by

    sajjadbappy70
    A perpetuity is an annuity with infinite cash flows. It provides continual annual cash flows that never end. The present value of a perpetuity can be easily calculated using the formula PV=C/r, where PV is the present value, C is the annual cash flow, and r is the interest rate. However, the future value of a perpetuity cannot be calculated because it continues indefinitely into the future.

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    © All Rights Reserved
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    Perpetuities

    Forever Never Ending

    A perpetuity is an annuity with an


    infinite life, providing continual
    annual cash flow
    ★Future Value of Perpetuity is not possible to calculate since It has an
    infinite time period.

    On the contrary, Calculating Present Value of a Perpetuity


    turns out to be an easy process , we can use the formula below
    assuming the interest rate remains constant over periods.

    here:
    - PV is the present value,
    - C is the cash flow per period,
    - r is the interest rate.
    Annuity VS Perpetuity

    Annuity Perpetuity

    For specified time period Continue Forever

    Has two classification No classification


    1. Ordinary annuity
    2. Annuity Due
    Future Value can be evaluated Future Value can not be evaluated

    Present Value can be evaluated Present Value can be

    More complex to handle Easy to handle


    FOR EXAMPLE, AN INVESTMENT OFFERS A PERPETUAL
    CASH FLOW 1,000 EVERY YEAR. THE RETURN REQUIRES
    IS 8 PERCENT. WHAT IS THE VALUE OF THIS
    INVESTMENT?
    PERPETUITY PV= CF/R
    = 1,000/0.08
    = 12,500
    The British government issued perpetuities in the form of bonds called consols. Upon
    purchase, a consol pays a small coupon forever (or until the debtor decides to redeem it)
    Characteristics Annuity Perpetuity
    A series of continuous cash flows of Perpetuity i
    an equal amount over a limited period continues f
    is known as Annuity.

    The annuity is for a fixed period but Perpetu

    In an annuity, the payment is made or Conversely


    received outflow is t
    Future Value of annuity can be easily which is no
    calculated Perpetuity.

    but an annuity is not perpetuity Perpetuity i


    • KEY DIFFERENCES BETWEEN ANNUITY AND PERPETUITY
    • THE FOLLOWING ARE THE MAJOR DIFFERENCES BETWEEN ANNUITY AND
    PERPETUITY:
    1. A SERIES OF CONTINUOUS CASH FLOWS OF AN EQUAL AMOUNT OVER A
    LIMITED PERIOD IS KNOWN AS ANNUITY. PERPETUITY IS A TYPE OF ANNUITY
    WHICH CONTINUES FOREVER.
    2. THE ANNUITY IS FOR A FIXED PERIOD, BUT PERPETUITY IS EVERLASTING.
    3. IN AN ANNUITY, THE PAYMENT IS MADE OR RECEIVED. CONVERSELY, IN
    PERPETUITY, ONLY CASH OUTFLOW IS THERE.
    4. FUTURE VALUE OF ANNUITY CAN BE EASILY CALCULATED WHICH IS NOT
    POSSIBLE IN CASE OF PERPETUITY.
    5. PERPETUITY IS AN ANNUITY, BUT AN ANNUITY IS NOT PERPETUITY.
    The Three Rules

    1. Amount Paid or received must be constant over the


    period of annuity.

    2. Time interval between two consecutive payments or


    receipts must be the same.

    3. It should not be for a specified Period. That means it will


    continue forever.
    Sr No Comparision Annuity Perpet

    1 Duration Duration of Annuity is certain, till the life of the financial asset. Duratio

    2 Types Ordinary Annuity and Annuity Due are the two types of Annuity No suc

    3 Interest It uses the compound interest to calculate the present or future value of Annuity It uses
    Characteristics Annuity Perpetuity
    Regular payment for a fixed period of time. Regular payment for infinite time.

    Definition

    The duration is limited. The duration is infinite, it is not limited.

    Duration

    There are two types; Ordinary Annuity and Annuity Due. No types in perpetuity.

    Types

    Payment is paid or received. Payment is received.


    Method

    Annuity is calculated by doing Compound Interest. Perpetuity is calculated by doing Simple Interest.

    Calculation

    Future Value can be calculated. Future value cannot be calculated.

    Future value

    Insurance, EMI Pension, Scholarship, Constant Dividend.

    Example
    • CONCLUSION
    • AFTER COMPREHENDING THE ABOVE INFORMATION, WE CAN EASILY
    DIFFERENCE BETWEEN ANNUITY AND PERPETUITY, THAT IS, THEIR TIME LIM
    FIXED FACE VALUE THAT IS PAID REGULARLY FOR FIXED NUMBERS OF YEA
    IS A PERPETUAL ANNUITY, THAT IS, THE ANNUITY WHICH IS PAID PER
    INFINITE TIME.
    • CALCULATIONS DONE FOR THE ANNUITY ARE COMPLEX, WHILE CALC
    PERPETUITY ARE SIMPLE. AN ANNUITY IS EASY TO UNDERSTAND, WHILE PE
    TO UNDERSTAND, AND SO IS ITS FUTURE VALUE, AN ANNUITY’S FU
    CALCULATED WHILE FOR PERPETUITY, IT IS ALMOST NOT POSSIBLE.

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