discount rateThe present value of an annuity is the current value of future payments from an annuity, given a specified rate of return, or discount rate. The higher the discount rate, the lower the present value of the annuity.
The present value of an annuity will increase by decreasing the discount rate.
One example of a perpetuity is the UK's government bond known as a Consol. Bondholders will receive annual fixed coupons (interest payments) as long as they hold the amount and the government does not discontinue the Consol.
The payment increases with a rise in interest rates all else held constant. The reason is that more of the payment is applied to the interest and so to reduce the principal at the same pace as before a higher payment is needed.
How are present values affected by changes in interest rates? The lower the interest rate, the larger the present value will be.
The present value of an annuity is based on the time value of money. You can invest money to make more money through interest and other return mechanisms, meaning that getting $5,000 right now is more valuable than being promised $5,000 in five years.
Perpetuity, in finance, refers to a security that pays a never-ending cash stream. The present value of a perpetuity is determined by dividing cash flows by the discount rate. Examples include annuities and British consols (which were discontinued in 2015).
Annuities are investments that make payments for a set duration of time. Perpetuities are investments that make payments indefinitely. A perpetuity is a type of annuity but extremely rare and not commonly offered by insurance companies. The value of a perpetuity tends to decrease over time.