Find the present value of an infinite stream of periodic payments.
Present Value—
Yield—
Formulas:
Regular: PV = C / r
Growing: PV = C / (r − g) (where r > g)
What is a Perpetuity?
A perpetuity is a financial instrument that pays a fixed amount indefinitely. Consols (British government bonds) and preferred stock dividends are real-world examples. A growing perpetuity increases its payment at a constant rate each period.
Applications
Stock valuation — Gordon Growth Model uses growing perpetuity
Real estate — Capitalization rate for income properties
Endowments — University endowment fund withdrawals