Perpetuity

What Is Perpetuity And How Is It Calculated?

This is one of the terms used in finance and investment circles. Perpetuity is one type of annuity which can be defined as the time it will take for a particular investment to cease attracting streams of payment. There are many kinds of investments that attract different kinds of returns. As the name may suggest, perpetuity is that kind of investment that will continue to receive streams of cash payments forever. It is an annuity that does not end.

In perpetuities, the time for the first periodic payment is fixed and from then on, the investment continues to receive further payments without end. There are only a few of such kind of investments available. It used to be issued in the past especially in Britain by the government. Nowadays the only investments that could be turned into perpetuities are those done in the real estate sector and also in some preferred stock.

The value of perpetuities falls as time passes by. That is to say that the firs payment received on a perpetuity contribute to its present value more than the subsequent ones. The value of future payments is of almost no value and is almost ignored when it comes to selling perpetuities.

Apart from this there are some other kinds of funds that are created as perpetuities. These are scholarship funds, funds meant for charities and other organizations, and some local government funds. Once these funds are created, a date is set for the first payment to be made and then on, regular payments are made into those funds.

How is perpetuity calculated?
Perpetuity is calculated by using the following formula:
PV = A/r

Where PV represents the present value, A is the amount of money that should be paid periodically and r is the rate of interest.

Perpetuities are useful in such cases where programs should continue to run without any fear of unavailability of funds. In cases of scholarships and awards, the availability of money is key to their existence. It will be a shame to hear at one time that such an award is not going to be given because there is no money to be paid to the winner. The use of perpetuities will help to avoid such situations.

It is worth noting here that because there are few cases of perpetuities today, annuities with very long payment periods are often referred to as perpetuities, but technically they are not because they have an end.