Question

explain why the duration of perpetuity is (1+y)/y ???

Answer 1

The duration of Level perpetuity is (1+y)/y.for example at a 10% yield the duration of perpetuity that pays $100 once a year forever will equal 1.10/10= 11 years but at an 8%yeild it will equal 1.08/0.08= 13.5years. This principle makes it obvious that maturity and duration can differ substantially. Perpetuity refers to an infinite amount of time. In finance it is constant stream of identical cash flows with no end such as with the British issued bonds known as consols the concept of perpetuity is also used in financial theory such as in the dividend discount model. By purchasing a console from the British government the bondholder is entitled to receive the annual interest payments forever although it may seem a bit in logical and infinite series of cash flows can have a finite present value because of the time value of money each payment is only a fraction of the last one. And and Unity is a stream of cash flows a perpetuity is a type of immunity that lasts forever into perpetuity the stream of cash flows continues for an infinite amount of time in financer person uses the perpetuity calculation in valuation methodologies to find the present value of companies cash flows when discounted back at a certain rate specially the perpetuity formula determine the amount of cash flows in the terminal of operation in valuation companies said to be Going Concern meaning that it goes on forever for this reason the terminal period is perpetuity and analysis to use this perpetuity formula to find its value. Basic formula used to calculate a perpetuity is cash flows divided by some discount rate the formula used to calculate the terminal year in stream of cash flows for evaluation purposes is bit more complicated it is the estimate of cash flows in a year 10 of the company X 1 + the company's long term growth rate and then divided by the difference between the cost of capital and the goat rate simplified the terminal year is some amount of cash flows divided by some amount of discount rate which is the basic formula for perpetuity. For example if a company is projected to make $100,000. In year 10and the company's cost of capita is 8% with a long term growth rate of 3 % the value of perpetuity is $100,000. X 1.03% and then divided by or 5% the answer is $2.06million. Perpetuity is an annuity in which the periodic payments begin on a fixed date and continue in definitely it is sometimes referred to as a perpetuity and it fixed coupon payments for permanently invested sums of money are prime examples of perpetuity Scholars paid per page PDF from an endowment fit the definition of perpetuity the value of perpetuity is finite because receipts that are anticipated for in the future have extremely low present value I like a typical Bond because the principal is never be paid there is no present value for the principal assuming that the payments begin at the end of the current period the price of the perpetuity is simply the coupon amount or the appropriate discount rate or yield.