A constant perpetuity is a financial instrument that pays a fixed amount of money at regular intervals indefinitely. It is valued by discounting the perpetual series of cash flows back to their present value.
congrats on reading the definition of constant perpetuity. now let's actually learn it.
The present value (PV) of a constant perpetuity is calculated using the formula PV = C / r, where C is the cash flow per period and r is the discount rate.
A constant perpetuity assumes that payments will continue forever without any change in amount.
The concept of a constant perpetuity is essential for understanding other financial instruments like preferred stocks and certain types of bonds.
Unlike annuities, which have a set end date, perpetuities do not have an expiration date.
Constant perpetuities are often used for valuing companies or investments with predictable, endless cash flows.
Review Questions
How do you calculate the present value of a constant perpetuity?
What distinguishes a constant perpetuity from an annuity?
Why might an investor be interested in purchasing a financial instrument modeled as a constant perpetuity?