Perpetuity

AAA

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:

Perpetuity



INVESTOPEDIA EXPLAINS '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. Distribution Yield

    The amount of cash flow received or paid out by an annuity, REIT ...
  2. Perpetual Bond

    A bond with no maturity date. Perpetual bonds are not redeemable ...
  3. Maturity Date

    The date on which the principal amount of a note, draft, acceptance ...
  4. Annuity

    A financial product sold by financial institutions that is designed ...
  5. Present Value - PV

    The current worth of a future sum of money or stream of cash ...
  6. Dividend Discount Model - DDM

    A procedure for valuing the price of a stock by using predicted ...
Related Articles
  1. Markets

    Digging Into The Dividend Discount Model

    The DDM is one of the most foundational of financial theories, but it's only as good as its assumptions.
  2. Investing Basics

    Understanding The Time Value Of Money

    Find out why time really is money by learning to calculate present and future value.
  3. Options & Futures

    The Importance Of Time Value In Options Trading

    Move beyond simply buying calls and puts, and learn how to turn time-value decay into potential profits.
  4. Investing

    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 dollar companies such as the Walt Disney Company and Coca-Cola have issued ...
  5. Bonds & Fixed Income

    How do I calculate yield to maturity of a zero coupon bond?

    Find out how to calculate the yield to maturity for a zero coupon bond, and see why this calculation is more simple than a bond with a coupon.
  6. Bonds & Fixed Income

    Why are bond yields calculated in terms of basis points?

    Find out why financial analysts and publications track and quote bond yields in basis points, or bps, rather than simply stating percentages.
  7. Professionals

    Monthly Pension Or Lump-Sum: Which Is Better?

    When a client is faced with the choice of a monthly pension or a lump-sum payment, which one is better? Here's a quick guide on how to decide.
  8. Trading Strategies

    How risky is it to enter into a debenture agreement?

    Understand the nature of debenture agreements and the inherent risks and clauses that may provide additional protection for bondholders.
  9. Professionals

    Immediate Annuities: What To Watch Out For

    Immediate annuities can provide substantially higher monthly payouts than other fixed-income instruments, but also have some key limitations.
  10. Personal Finance

    What Are Your Financial Resolutions For 2015?

    The end of a year evokes the inclination to look back, reflect, and resolve to make positive changes, like getting the finances on track once and for all.

You May Also Like

Hot Definitions
  1. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  2. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  3. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  4. Break-Even Analysis

    An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even ...
  5. Key Performance Indicators - KPI

    A set of quantifiable measures that a company or industry uses to gauge or compare performance in terms of meeting their ...
  6. Bank Guarantee

    A guarantee from a lending institution ensuring that the liabilities of a debtor will be met. In other words, if the debtor ...
Trading Center