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Perpetuity Definition

What Is Perpetuity?

A perpetuity is a security that pays for an infinite amount of time. In finance, perpetuity is a constant stream of identical cash flows with no end. The formula to calculate the present value of a perpetuity, or security with perpetual cash flows, is:

PV=C(1+r)1+C(1+r)2+C(1+r)3=Crwhere:PV=present valueC=cash flowr=discount ratebegin{aligned} &text{PV} = frac { C }{ ( 1 + r ) ^ 1 } + frac { C }{ ( 1 + r ) ^ 2 } + frac { C }{ ( 1 + r ) ^ 3 } cdots = frac { C }{ r } \ &textbf{where:} \ &text{PV} = text{present value} \ &C = text{cash flow} \ &r = text{discount rate} \ end{aligned}

PV=(1+r)1C+(1+r)2C+(1+r)3C=rCwhere:PV=present valueC=cash flowr=discount rate

The concept of a perpetuity is also used in a number of financial theories, such as in the dividend discount model (DDM).

Key Takeaways

  • A perpetuity, in finance, refers to a security that pays a never-ending cash stream.
  • The present value of a perpetuity is determined using a formula that divides cash flows by some discount rate.
  • The British consol is an example of a perpetuity.

Understanding Perpetuity

Perpetuity Formula

Perpetuity Example

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