DEFINITION of 'Perpetuity'

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



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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).

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  1. How is perpetuity used in determining the intrinsic value of a stock?

    Investors are often interested in determining intrinsic values of the stocks, bonds or other securities as they consider ... Read Full Answer >>
  2. Is an annuity a perpetuity?

    An annuity can be a perpetuity, depending on how it is set up. An annuity is an investment that makes regular payments throughout ... Read Full Answer >>
  3. Why do companies issue 100-year bonds?

    Although it is rare, companies do issue bonds that exceed an average person's life expectancy. For example, multi-billion ... Read Full Answer >>
  4. Can I borrow from my annuity to put a down payment on a house?

    You can borrow from your annuity to put a down payment on a house, but be prepared to pay an assortment of fees and penalties. ... Read Full Answer >>
  5. What are the main kinds of annuities?

    There are two broad categories of annuity: fixed and variable. These categories refer to the manner in which the investment ... Read Full Answer >>
  6. What are the risks of rolling my 401(k) into an annuity?

    Though the appeal of having guaranteed income after retirement is undeniable, there are actually a number of risks to consider ... Read Full Answer >>

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