Time Value of Money.2

Definition of Annuity

The constant periodic cash flows, over a specified period, is known as Annuity. The cash flows can be receipts or disbursements of equal amounts made at a set time interval, i.e. weekly, monthly, quarterly, semiannually, or annually. The following are the types of annuity:

• Ordinary Annuity: The payment or deposit of cash occurs at the year.
• Annuity Due: The inflow or outflow of cash occurs at the beginning.
• Perpetuity: The annuity which is everlasting.
• Others: Some other annuity types are fixed annuity and variable annuity.

An indefinite series of payment of equal amounts at regular intervals on a fixed date is known as Perpetuity. The word ‘Perpetuity’ is a combination of two terms perpetual annuity, i.e. a form of annuity which goes on forever and therefore its future value cannot be calculated. Hence, it is a continuous stream of consistent cash flows over the years.

First and foremost the initial fund i.e. principal is established and then the payments flow from the funds for an infinite period. These fixed cash flows are the annual interest payments.It starts at a particular date and lasts forever. Perpetuity is divided into two categories:

• Constant Perpetuity: Remains constant over the years
• Growing Perpetuity: Grows at a uniform rate forever.