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Present Value of a Perpetuity

CFA® Exam Level 1, Financial Mathematics

Time Value of Money (CFA L1) Present Value of a Perpetuity

A perpetuity is a type of annuity that pays equal cash flows that occur periodically such as monthly, quarterly or annually for an infinite period of time.

The present value of an annuity is calculated using the following formula:

PV = A/r

Where, A is the annuity payment, and r is the interest rate.

Assume that an perpetuity pays $500 per year. The rate of return is 8%. The present value of this perpetuity is calculated as follows:

PV = 500/0.08 = $6,250

If the investor invests $6,250 in the perpetuity paying 8% rate of return, he will receive a payment of $500 per year for an infinite period.

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Course Home
Introduction – Time Value of Money
Interest Rates
Interest Rate Equation
Nominal Interest Rate and Effective Yield
Time Value of Money for Different Compounding Frequencies
Future Value of a Single Cash Flow
Present Value of a Single Cash Flow
Future Value and Present Value of Ordinary Annuity
Present Value and Future Value of Annuity Due
Present Value of a Perpetuity
Present Value and Future Value of Uneven Cash Flows
Annuities with Different Compounding Frequencies
Using a Timeline to Solve Time Value of Money Problems
Time Value of Money Quiz 1 ( Reading 6, CFA Level I)
Return to Time Value of Money (CFA L1)

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