There are two basic concepts of debt repayment in corporate or personal finance, through which you can value financial assets, known as annuities and perpetuities. An annuity refers to a series of structured payments people make regularly at a certain rate of interest, while perpetuity is a category of annuity that deviates from ordinary annuities on many fronts. The two kinds of payments may sometimes create confusion because of their close relationship, but there are equally clear differences between them.
Relationship
There are two major categories of annuities, namely, annuities due and ordinary annuities, which differ according to when the payment takes place. Another type of annuity is known as embedded annuity, which exists in a series of cash flows, some of which do not form part of an annuity. Perpetuity is a kind of annuity in which periodic payments start on a particular date and then continue forever, such as when you permanently invest in funds from a fixed coupon payment or a scholarship you pay indefinitely from endowments.
Functional Period
One major difference between the forms of payment is that in perpetuity, payments start on a predetermined time but continue for an infinite period of time. Examples of perpetuities are payments on property tax and preferred stocks or a life-guaranteed annuity. However, cash flows in an annuity -- such as mortgages, payment of a car loan, lease payments and long-term interest- bearing securities -- get to exist for a preset, limited period of time usually up to 30 years after the commencement of payments.
Returns on Investment
Repayment of face value also differs among perpetuity and ordinary annuities because an annuity comes with a particular face value while perpetuity does not. You may consider an annuity as a premium if you sell it at a percentage more than its face value but a discount if
you sell it at an amount below its face value. You will get back the face value after maturity of the annuity but not with perpetuity, where you get nothing extra except coupon payments.
Cash Flows
An annuity and perpetuity are different in relation to cash flow in the sense that with annuities you can receive a definite amount of cash flow within a certain time frame, which you cannot outlive. On the other hand, perpetuities add to another source of income you already have, for example, plan for your college tuition or extra income for people who retire. This may not be the best option for retirees because they may not get enough income to survive on and may wait a very long time to enjoy the profits.
