Perpetuities (1 Viewer)

[UWS-Uni-Student]

Urgent: Perpetuities

(Note to the MODS):I'm not sure if this is the right place to put this questions, and if it is in the wrong place, feel free to move it.


If anyone here knows about perpetuities, I would be grateful if you could tell me if the following formula always applies:

PVA∞ = PMT ÷ i = PMT × PVIFAi,∞ = PMT × 1/i

where:
PMT = Payment from perpetuity
i = interest rate
PVA = Present Value




I know that this applies when the payment period is equal to the interest compound period and when the payment period (say monthly) is not equal to the interest compund period (say yearly).



For instance if the compund period is monthly and the PMT period is monthly, then




PMT = say 900
i = 12 % p.a. compund monthly, thus = 0.01



Then assuming that you have the first PMT in 1 months time (I assume it is the end of the month)



Then the above formula applies, right?



Now assume that the first PMT is at the beginning of the 1st month, will the same formula apply?



Will is also apply when the 1st PMT is 12 months from now?

 

[UWS-Uni-Student]

Re: Urgent: Perpetuities

I have worked out how to use a formula like this in order to find deferred perpetuity, but a "perpetuity due" (Did I just make that term up?) I am still unsure how to determine

PVA = PMT × 1/i × [1/(1+i)n-1]

 

[Rorix]

Re: Urgent: Perpetuities

Now assume that the first PMT is at the beginning of the 1st month, will the same formula apply?

Will is also apply when the 1st PMT is 12 months from now?

I can answer these questions for you but I really think your understanding of the topic would be better if you managed to work it out yourself by considering the timing of the cash flows/interest rates.


However, the answers are provided below although I advise you not to look

if cashflows are at the beginning of the month, times by 1+r

if the first cash flow is in 12 months, discount it backwards

 

[UWS-Uni-Student]

Re: Urgent: Perpetuities

I can answer these questions for you but I really think your understanding of the topic would be better if you managed to work it out yourself by considering the timing of the cash flows/interest rates.


However, the answers are provided below although I advise you not to look

if cashflows are at the beginning of the month, times by 1+r

if the first cash flow is in 12 months, discount it backwards

I have tried for the last couple of days, and I can't work it out,

So for the "perpetuity due" it is basically like an Annuity due except that you have (1 + i) * (PMT/i) ? Which means that you just add the ordinary perpetuity to the value of a PMT



And for a deferred perpetuity PVA = PMT × 1/i × [1/(1+i)n-1]


Are these right?

If you, thank you so very much

 

[ND]

Re: Urgent: Perpetuities

I have tried for the last couple of days, and I can't work it out,

So for the "perpetuity due" it is basically like an Annuity due except that you have (1 + i) * (PMT/i) ? Which means that you just add the ordinary perpetuity to the value of a PMT

That's right.

And for a deferred perpetuity PVA = PMT × 1/i × [1/(1+i)n-1]

What is n here? Instead of learning 'tricks' and formulae, just think back to the geometric series the cashflows represent and go from there.

 

[Rorix]

Re: Urgent: Perpetuities

What is n here? Instead of learning 'tricks' and formulae, just think back to the geometric series the cashflows represent and go from there.

What ND said.


For the deferred annuity, work out the PV in 11 months (if the first payment is in 12) and then discount it back 11 months.

If that's what your formula represents, then its right.

 

[UWS-Uni-Student]

Re: Urgent: Perpetuities

Thanks guys, I guess the thread can now close

 

[stazi]

Re: Urgent: Perpetuities

question: this isn't first year accounting by any chance?
if it is, remind me to unenrol from accounting 1B

 

[UWS-Uni-Student]

Re: Urgent: Perpetuities

question: this isn't first year accounting by any chance?
if it is, remind me to unenrol from accounting 1B

No more like 2nd year finance

 

[Newbie]

Re: Urgent: Perpetuities

on hindsight
i still dont know whats worse
this maths or accounting consolidation

 

[CieL]

Re: Urgent: Perpetuities

No more like 2nd year finance

You're kidding me.. 2nd yr finance you learn perpetuities?

More like 1st yr, 1st sem wk6 finance for me..

 

[sarah198]

I'm doing first year finance at ANU and thats what we're doing. It definately isn't second year, its the very basics.

 

[redruM]

Re: Urgent: Perpetuities

on hindsight
i still dont know whats worse
this maths or accounting consolidation

Consolidation by 3 body lengths.

 

[UWS-Uni-Student]

Re: Urgent: Perpetuities

You're kidding me.. 2nd yr finance you learn perpetuities?

More like 1st yr, 1st sem wk6 finance for me..

well its classed as a second year unit, but yeah its fairly easy

 

[pete_mate]

wtf is PVA and PMT?

we only use NPV, PV, and FV

 

[Rorix]

re the 2nd/1st year thing, it seems to be standard fare of the first finance subject you take. Depending on the uni that may be 1st or 2nd year..

 

[UWS-Uni-Student]

wtf is PVA and PMT?

we only use NPV, PV, and FV

PVA = Present Value of an annuity
PMT = Payment