Perpetuity

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



  
Investopedia Says... 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).

Terms Related Links

Annuity
Dividend Discount Model - DDM
Maturity Date
Monthly Income Plan - MIP
Perpetual Bond
Present Value - PV

Terms Related Links
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.

Understanding The Time Value Of Money - Find out why time really is money by learning to calculate present and future value.

The Importance of Time Value - Move beyond simply buying calls and puts, and learn how to turn time-value decay into potential profits.

Why do companies issue 100-year bonds?




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