Perpetuity

A perpetuity is an annuity in which the periodic payments begin on a fixed date and continue indefinitely. Fixed coupon payments on permanently invested (irredeemable) sums of money are prime examples of perpetuities. Scholarships paid perpetually from an endowment fit the definition of perpetuity.

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The value of the perpetuity is finite because receipts that are anticipated far in the future have extremely low present value (today's value of the future cash flows). Additionally, because the principal is never repaid, there is no present value for the principal. The price of perpetuity is simply the coupon amount over the appropriate discount rate or yield. To give a numerical example, a 3% UK government War Loan will trade at 50 pence per pound in a yield environment of 6%, whilst at 3% yield it is trading at par.

Related Topics:
Principal - Discount

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