Perpetuity means forever or something that is perpetual and unending. A perpetuity is also an annuity in which the periodic payments begin on a fixed date and continue indefinitely. Examples of perpetuities include fixed coupon payments on permanently invested funds or scholarships paid perpetually from an endowment.
To calculate the present value of a perpetuity which is an endowment that releases $1000 each year, assuming the interest rate at your bank is going to be 3%:
PV (of a perpetuity) = payment / interest rate if
- PV (of a perpetuity) = payment / interest rate
- PV = $ 1000 / .03
- PV = $ 33,333
Therefore, if you put $ 33,333 into the bank, each year the money earns $1000 interest that the endowment releases.