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Legal Dictionary

perpetuity

Legal Definition of perpetuity

Noun

  1. Forever; of unlimited duration. There is a strong bias in the law against things that are to last in perpetuity. Rights that are to last forever are said to hinder commerce as an impediment to the circulation of property. That is why there is a rule against perpetuities.

Definition of perpetuity

Noun

perpetuity (uncountable)

  1. The quality or state of being perpetual; endless duration; uninterrupted existence.
  2. Something that is perpetual.
  3. (law) A limitation intended to be unalterable and of indefinite duration; a disposition of property which attempts to make it inalienable beyond certain limits fixed or conceived as being fixed by the general law.
  4. (finance) An annuity in which the periodic payments begin on a fixed date and continue indefinitely.

Further reading

A perpetuity is an annuity that has no definite end, or a stream of cash payments that continues forever. There are few actual perpetuities in existence (the United Kingdom (UK) government has issued them in the past; these are known and still trade as consols). A number of types of investments are effectively perpetuities, such as real estate and preferred stock, and techniques for valuing a perpetuity can be applied to establish price. Perpetuities are but one of the time value of money methods for valuing financial assets.

The concept is closely linked to terminal value and terminal growth rate in valuation.

Detailed description

A perpetuity is an annuity in which the periodic payments begin on a fixed date and continue indefinitely. It is sometimes referred to as a perpetual annuity. Fixed coupon payments on permanently invested (irredeemable) sums of money are prime examples of perpetuities. Scholarships paid perpetually from an endowment fit the definition of perpetuity.

The value of the perpetuity is finite because receipts that are anticipated far in the future have extremely low present value (present value of the future cash flows). Unlike a typical bond, because the principal is never repaid, there is no present value for the principal. The price of a perpetuity is simply the coupon amount over the appropriate discount rate or yield.

References:

  1. Wiktionary. Published under the Creative Commons Attribution/Share-Alike License.



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