What is the Difference Between Annuity and Perpetuity?

An annuity and a perpetuity are both investments that provide regular payments, but they differ in terms of the duration of the payments. Here are the key differences between the two:

1. Duration of Payments: An annuity provides regular payments for a set duration of time, while a perpetuity provides regular payments indefinitely.
2. Expiration Date: Annuities have an expiration date, meaning the payments will stop after a certain period of time, while perpetuities do not have an expiration date and continue to make payments indefinitely.
3. Calculation: When calculating the present value or future value of an annuity, you must consider cash flow, cash flow frequencies, interest rate, and the time at which the first payment is made. In contrast, the calculation of a perpetuity is simpler, as it only requires knowledge of the cash flow per period and the interest rate.
4. Rarity: Perpetuities are a form of annuity but are extremely rare and not commonly offered by insurance companies.

In summary, annuities are investments that provide regular payments for a specific period of time, while perpetuities are investments that provide regular payments indefinitely without any expiration date. Both are used to calculate the present or future value of financial products, but their calculations differ based on the duration of the payments.

Comparative Table: Annuity vs Perpetuity

Annuity and perpetuity are both financial instruments that provide regular payments, but they differ in duration, structure, and risk factors. Here is a table summarizing the differences between annuity and perpetuity:

Annuities are a series of payments made over a predetermined time period, commonly used for providing a steady income for retirees. On the other hand, perpetuities are an infinite series of periodic payments of equal face value, providing constant payments forever. Annuity payments might change over the years depending on the terms of the contract, while perpetuity payments remain constant forever. Annuities carry more risk as their value depends on the length of the time period and future finance conditions, whereas perpetuities are less risky as they guarantee constant income indefinitely. The present value of an annuity is calculated by compounding the stated interest rate, while the present value of a perpetuity is calculated using the actual interest rate.