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Perpetuity

• A constant stream of identical cash flows without end, such as a British consol.

• An annuity with an infinite life, involvng equal and periodic (regular) cash flows.

• Infinitely many cash flows of identical magnitude. First cash flow starts next period. Examples of securities that provide cash flows in perpetuity would be perpetual preferred stocks, consol bonds (which have no maturity dates), and stock dividends if all dividends have the same magnitude.

• Is a stream of payments or a type of annuity that starts payments on a fixed date and such payments continue forever, or perpetually. Often preferred stock which pays a dividend is considered as a form of perpetuity. However, one must assume that the firm does not go bankrupt or is otherwise impeded for making timely payments. The formula for evaluating a perpetuity is relatively straight forward. It is simply the expected income stream divided by a discount factor or market rate of interest. It reflects the expected present value of all payments. It is comparable to a perpetual bond or Consol in this respect. If a preferred issue pays a $2.00 quarterly dividend and the annual interest rate is 5 percent then one would expect to be willing to pay 2.50/.0125, or $200 per share. Here, the 5 percent interest rate was adjusted for a simple quarterly disbursement (.05/4 = .0125).

 
 Embedded terms in definition
 Annuity
Bond
Cash flow
Cash
Consol
Discount factor
Discount
Dividends
Dividend
Factor
Firm
Forward
Go
Income
Interest rate
Interest
Issue
Market
Maturity date
Maturity
Preferred stock
Present value
Rate of interest
Securities
Share
Stock dividend
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Type
Without
 
 Referenced Terms
 Annuity: Fixed number of identical cash flows that start one period from today. Typically, annuity products are used to provide income in retirement.Is an insurance product which comes in two basic forms: fixed and variable. The fixed version can make a lump sum or periodic lifetime payments to the annuitant. The variable version has a separate account attached to the annuity contract. This type of contract is considered a security because it is dependent on equities and its total value is subject to fluctuate due to market risk. There are many annuity varieties. Some are: Annuity Certain, Annuity Due, Deferred Annuity, Fixed Annuity, Life Annuity, Ordinary Annuity, Perpetuity, and Variable Annuity. Also, see Interest Impact on Present Value of Ordinary Annuity of 1 Per Period.A regular periodic payment made by an insurance company to a policyholder for a specified period of time.A finite stream of equal and periodic (regular) cash flows. These cash flows can be inflows of returns earned on investments or outflows of funds invested to earn future returns.(1) A series of periodic payments. (2) A contract under which an insurance company promises to make a series of regular payments to a named individual for life.

 Dividend growth model: A model wherein dividends are assumed to be at a constant rate in Perpetuity.

 Growing perpetuity: This refers to a Perpetuity that grows at a constant rate forever. Present value of such a growing perpetuity equals next years cash flow divided by the difference between the market capitalization rate and the growth rate. To be sustainable, growth rate must be less than the market capitalization rate.A constant stream of cash flows without end that is expected to rise indefinitely.

 
 Related Terms
 Growing perpetuity

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Life is not easy for any of us. But what of that? We must have perseverance and above all confidence in ourselves. We must believe that we are gifted for something and that this thing must be attained. Marie Curie

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