Perpetuity
Candlefocus EditorThe present value of a perpetuity, or the amount of cash flows from the investment you should expect to receive, is determined by dividing the amount of the regular cash flows by the discount rate. The discount rate is the rate at which an investment’s future cash flows are reduced to reflect the time preference and the risk associated with the investment.
Growing perpetuities are investments where the amount of the cash flows received each period increases over time. This form of perpetuity generally involves the reinvestment of a portion of the returns of the investments, which in turn increase the cash flow received in successive periods.
Due to the potential losses associated with enrolling in a perpetuity, they are not usually a recommended investment option. Perpetuity investments can experience limited liquidity and can be difficult to value if there are periods of slow returns. Additionally, the capital gains tax incurred when selling a perpetuity investment can be substantial.
In spite of these potential downsides, perpetuities can prove extremely beneficial to those looking for a steady income stream without having to worry about the security expiring. Insurance companies, for example, often utilize perpetuity investments to aid them in meeting their long-term obligations to policyholders.
Perpetuities are not often used in the average person’s investment portfolio. But those looking for a secure and consistent income for the long-term could do well by investing in a perpetuity. Not only does this type of investment provide a steady stream of income but it also helps to reduce the effects of market volatility.