How to Define Perpetuity

In the world of business, perpetuity is defined as a constant payment of a set amount of money that continues forever. It refers to an investment of little or no current value that provides annual interest payments without end.

Instructions

Difficulty: Easy

1. Understand that the value of a perpetuity lies in its set payments. It has little or no current value and the original investment is never repaid. The original investment is considered permanently invested. It is like an annuity but does not end.
2. Note that a perpetuity has a fixed starting date and fixed payment. Since there is no ending date that is also fixed, in theory your descendants will be enjoying the payout forever.
3. Realize that a perpetuity has a finite value even though it has an infinite payout. This is because the investment has no current value and the payouts in the future have very little value today. The value of a perpetuity is in time.
4. Take a look around and you can find investments that mimic perpetuity. These include common stock and real estate. The valuation of a company's common stock can be can be based on future dividends that are considered indefinite. A piece of property can be assumed to provide a set income indefinitely. If the property is sold, the value of that perpetual income is factored into the value.
5. Consider a regular annuity with a very long expiration date if you are looking for perpetual income. This is because there are very few actual perpetuities. The best known example is consolidated annuities first offered by the British government in the eighteenth century. They are called "consols" for short. They still exist today but are not considered a popular investment.