What is Delayed Perpetuity
Delayed perpetuity is a perpetual stream of cash flows that start at a predetermined date in the future. For example, preferred fixed dividend paying shares are often valued using a perpetuity formula. If the dividends are going to originate five years from now, rather than next year, the stream of cash flows would be considered a delayed perpetuity.
BREAKING DOWN Delayed Perpetuity
Delayed perpetuity is based on the concept of perpetuity. In financial terms, perpetuity refers to a constant series of payments received over time with no end. Rather than beginning in the present, a financial instrument with delayed perpetuity has payments that begin at some point in the future. Delayed perpetuity is also sometimes referred to as deferred perpetuity.
It is possible to calculate the present value of a financial instrument that relies on delayed perpetuity. Such an example involves a version of the perpetuity formula, albeit one that factors in the discounted value of the delayed income.
It is important to remember that the net present value, or NPV, of a delayed perpetuity is less than a comparable ordinary perpetuity. This is because of time value of money principles, which hold that money available in the present moment is worth more than the same sum of money available in the future. Money in the present moment is worth more because of its potential ability to earn interest, as well as other opportunity costs associated with money received on a delayed basis. In calculating the present value of delayed perpetuity payments, the payments have to be discounted to account for the delay.
Examples of Delayed Perpetuity
Retirement products are often structured as delayed perpetuities. They allow retirees or prospective retirees to invest money now which they can rely on later to fund their daily expenses in retirement.
A deferred annuity is a good example of a financial instrument that relies on delayed perpetuity. Investors in a deferred annuity receive a consecutive stream of fixed payments in perpetuity beginning at a future date. For example, a deferred annuity may provide $10,000 payments annually, with the first payment delayed until the end of the sixth year.
Fixed dividend shares, also known as preferred stock shares, can also be structured as delayed perpetuities, if the payments are scheduled to begin at a future date rather than right away.