Perpetuity

Loading the player...

What does 'Perpetuity' mean

Perpetuity is a constant stream of identical cash flows with no end. The formula for determining the present value of a perpetuity is as follows:

Perpetuity

BREAKING DOWN 'Perpetuity'

This is not as abstract a concept as you may think; the British issued bonds, called consols, which are a great example of a perpetuity. By purchasing a consol from the British government, the bondholder is entitled to receive annual interest payments forever. Although it may seem a bit illogical, an infinite series of cash flows can have a finite present value. Because of the time value of money, each payment is only a fraction of the last.

The concept of a perpetuity is used often in financial theory, such as the dividend discount model (DDM).

RELATED TERMS
  1. Delayed Perpetuity

    A perpetual stream of cash flows that start at a predetermined ...
  2. Perpetual Bond

    A bond with no maturity date. Perpetual bonds are not redeemable ...
  3. Perpetual Preferred Stock

    A type of preferred stock that has no maturity date. The issuers ...
  4. Perpetual Subordinated Loan

    A type of junior debt that continues indefinitely and has no ...
  5. Perpetual Option - XPO

    A non-standard financial option with no fixed maturity and no ...
  6. Perpetual Inventory

    A method of accounting for inventory that records the sale or ...
Related Articles
  1. Economics

    Understanding Perpetuity

    Perpetuity means without end. In finance, a perpetuity is a flow of money that will be received on a regular basis without a specified ending date.
  2. Bonds & Fixed Income

    Perpetual Bonds: An Overview

    A perpetual bond makes interest payments to the investor forever. This type of bond holds a certain appeal to both the issuer and buyer.
  3. Professionals

    Perpetuities

    A perpetuity is a constant stream of identical cash flows with no end. Find out all about them.
  4. Fundamental Analysis

    Understanding Periodic Vs. Perpetual Inventory

    An overview of the two primary inventory accounting systems.
  5. Professionals

    Rule Against Perpetuities / Estate and Gift Taxation

    Rule Against Perpetuities / Estate and Gift Taxation
  6. Options & Futures

    Stock-Picking Strategies: Fundamental Analysis

    Ever hear someone say that a company has "strong fundamentals"? The phrase is so overused that it's become somewhat of a cliché. Any analyst can refer to a company's fundamentals without ...
  7. Economics

    How Does a Perpetual Inventory System Work?

    Perpetual inventory is a system that continually tracks inventory items for quantity and availability.
  8. Professionals

    Bond Valuation Basics

    CFA Level 1 - Bond Valuation Basics. Learn the three basic steps behind bond valuation. Covers the fundamental principles of discounting a security's expected cash flows.
  9. Fundamental Analysis

    DCF Analysis: Coming Up With A Fair Value

    By Ben McClure Contact Ben Now that we have calculated the discount rate for the Widget Company, it's time to do the final calculations to generate a fair value for the company's equity. Calculate ...
  10. Professionals

    Present Value And Discounting

    It is important to know how to calculate the time value of money so that you can distinguish between the worth of investments that offer you returns at different times.
RELATED FAQS
  1. Is an annuity a perpetuity?

    Find out how an annuity can sometimes be a perpetuity, and understand how an annuity's payments can be set up to make it ... Read Answer >>
  2. What are the differences between an annuity derivation and perpetuity derivation ...

    Understand the differences between an annuity derivation and perpetuity derivation of the time value of money. Learn the ... Read Answer >>
  3. Is Social Security Income a perpetuity?

    Find out why Social Security income is not classified as a perpetuity, including what constitutes a perpetuity and the basics ... Read Answer >>
  4. For $800,000 invested today, an insurance company promises to start making perpetual ...

    The correct answer is: A) We must first link the $800,000 today to the period when the perpetuity payments will begin. In ... Read Answer >>
  5. How is perpetuity used in determining the intrinsic value of a stock?

    Learn about the basics of a perpetuity, its valuation, how it is calculated and how it is used when evaluating the intrinsic ... Read Answer >>
  6. How is perpetuity used in the Dividend Discount Model?

    Learn about how the concept of a stock perpetuity is used in the basic dividend discount model, which is also known as the ... Read Answer >>
Hot Definitions
  1. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  2. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  3. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  4. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  5. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  6. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
Trading Center