Perpetuities

Forever Never Ending

A perpetuity is an annuity with an

infinite life, providing continual
annual cash flow
★Future Value of Perpetuity is not possible to calculate since It has an
infinite time period.

On the contrary, Calculating Present Value of a Perpetuity

turns out to be an easy process , we can use the formula below
assuming the interest rate remains constant over periods.

here:
- PV is the present value,
- C is the cash flow per period,
- r is the interest rate.
 Annuity VS Perpetuity

Annuity Perpetuity

For specified time period Continue Forever

Has two classification No classification

1. Ordinary annuity
2. Annuity Due
Future Value can be evaluated Future Value can not be evaluated

Present Value can be evaluated Present Value can be

More complex to handle Easy to handle

FOR EXAMPLE, AN INVESTMENT OFFERS A PERPETUAL
CASH FLOW 1,000 EVERY YEAR. THE RETURN REQUIRES
IS 8 PERCENT. WHAT IS THE VALUE OF THIS
INVESTMENT?
PERPETUITY PV= CF/R
= 1,000/0.08
= 12,500
The British government issued perpetuities in the form of bonds called consols. Upon
purchase, a consol pays a small coupon forever (or until the debtor decides to redeem it)
Characteristics Annuity Perpetuity
A series of continuous cash flows of Perpetuity i
an equal amount over a limited period continues f
is known as Annuity.

The annuity is for a fixed period but Perpetu

In an annuity, the payment is made or Conversely

received outflow is t
Future Value of annuity can be easily which is no
calculated Perpetuity.

but an annuity is not perpetuity Perpetuity i

• KEY DIFFERENCES BETWEEN ANNUITY AND PERPETUITY
• THE FOLLOWING ARE THE MAJOR DIFFERENCES BETWEEN ANNUITY AND
PERPETUITY:
1. A SERIES OF CONTINUOUS CASH FLOWS OF AN EQUAL AMOUNT OVER A
LIMITED PERIOD IS KNOWN AS ANNUITY. PERPETUITY IS A TYPE OF ANNUITY
WHICH CONTINUES FOREVER.
2. THE ANNUITY IS FOR A FIXED PERIOD, BUT PERPETUITY IS EVERLASTING.
3. IN AN ANNUITY, THE PAYMENT IS MADE OR RECEIVED. CONVERSELY, IN
PERPETUITY, ONLY CASH OUTFLOW IS THERE.
4. FUTURE VALUE OF ANNUITY CAN BE EASILY CALCULATED WHICH IS NOT
POSSIBLE IN CASE OF PERPETUITY.
5. PERPETUITY IS AN ANNUITY, BUT AN ANNUITY IS NOT PERPETUITY.
 The Three Rules

1. Amount Paid or received must be constant over the

period of annuity.

2. Time interval between two consecutive payments or

receipts must be the same.

3. It should not be for a specified Period. That means it will

continue forever.
Sr No Comparision Annuity Perpet

1 Duration Duration of Annuity is certain, till the life of the financial asset. Duratio

2 Types Ordinary Annuity and Annuity Due are the two types of Annuity No suc

3 Interest It uses the compound interest to calculate the present or future value of Annuity It uses
Characteristics Annuity Perpetuity
Regular payment for a fixed period of time. Regular payment for infinite time.

Definition

The duration is limited. The duration is infinite, it is not limited.

Duration

There are two types; Ordinary Annuity and Annuity Due. No types in perpetuity.

Types

Payment is paid or received. Payment is received.

Method

Annuity is calculated by doing Compound Interest. Perpetuity is calculated by doing Simple Interest.

Calculation

Future Value can be calculated. Future value cannot be calculated.

Future value

Insurance, EMI Pension, Scholarship, Constant Dividend.

Example
• CONCLUSION
• AFTER COMPREHENDING THE ABOVE INFORMATION, WE CAN EASILY
DIFFERENCE BETWEEN ANNUITY AND PERPETUITY, THAT IS, THEIR TIME LIM
FIXED FACE VALUE THAT IS PAID REGULARLY FOR FIXED NUMBERS OF YEA
IS A PERPETUAL ANNUITY, THAT IS, THE ANNUITY WHICH IS PAID PER
INFINITE TIME.
• CALCULATIONS DONE FOR THE ANNUITY ARE COMPLEX, WHILE CALC
PERPETUITY ARE SIMPLE. AN ANNUITY IS EASY TO UNDERSTAND, WHILE PE
TO UNDERSTAND, AND SO IS ITS FUTURE VALUE, AN ANNUITY’S FU
CALCULATED WHILE FOR PERPETUITY, IT IS ALMOST NOT POSSIBLE.