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Corporate Finance: Time value of money · Annuities and Perpetuities

How to value streams of equal or growing payments, from loans and leases to payments that last forever.

Corporate Finance · 24 questions

Try 3 questions

1. In finance, what is an annuity?

  1. A single lump sum invested for many years
  2. Equal payments at regular intervals for a set time
  3. Any payment made once a year
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Answer: Equal payments at regular intervals for a set time

An annuity is a fixed number of equal, evenly spaced cash flows; it need not be annual and need not be a pension product.

2. A perpetuity pays 100 a year forever, starting in one year. At a 5% discount rate, what is it worth today?

  1. 500
  2. 2,000
  3. Infinite, since payments never stop
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Answer: 2,000

A perpetuity's present value is the payment divided by the rate: 100 / 0.05 = 2,000. Distant payments are worth almost nothing today, so the sum is finite.

3. If the discount rate on a perpetuity doubles from 5% to 10%, what happens to its present value?

  1. It stays the same
  2. It falls by about 5%
  3. It halves
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Answer: It halves

Since the value is payment divided by rate, doubling the rate cuts the value in half: 100 / 0.10 = 1,000 instead of 2,000.

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