1. What is a Monthly Perpetuity?

A monthly perpetuity is a financial instrument that pays a fixed amount each month indefinitely. The present value (PV) represents what this infinite stream of payments is worth today, discounted at an appropriate rate.

2. How Does the Calculator Work?

The calculator uses the monthly perpetuity formula:

Where:

• \( PV \) — Present value of the perpetuity (USD)
• \( \text{Monthly PMT} \) — Fixed monthly payment amount (USD)
• \( r \) — Annual discount rate (decimal)

Explanation: The formula discounts the infinite stream of monthly payments by converting the annual rate to a monthly rate and dividing the payment by this rate.

3. Importance of Perpetuity Calculation

Details: Perpetuity valuation is crucial for valuing financial instruments, pension obligations, and certain types of investments that promise indefinite cash flows.

4. Using the Calculator

Tips: Enter the monthly payment amount in USD and the annual discount rate as a decimal (e.g., 5% = 0.05). Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between annual and monthly perpetuity?
A: Monthly perpetuities make payments each month rather than annually, requiring the annual rate to be divided by 12 for proper discounting.

Q2: When is this calculation used in real life?
A: Common applications include valuing preferred stocks, certain types of bonds, endowment funds, and pension obligations.

Q3: What discount rate should I use?
A: The appropriate rate depends on the riskiness of the cash flows - typically a risk-adjusted market rate for similar instruments.

Q4: Are perpetuities really infinite?
A: While true perpetuities are rare, many long-term instruments (30+ years) are valued as perpetuities for practical purposes.

Q5: How does inflation affect perpetuity valuation?
A: Either the discount rate should include an inflation premium, or for growing perpetuities, the growth rate should account for expected inflation.