Perpetuity question question

lxwarr30

One of the question I have encountered uses N=3 to discount present value of perpetuity when it is paid exactly four years from today. Just FYI, funds are available and deposited today and we are calculating present value to be deposited for the given rate and perpetuity amount. Shouldn't we be using 4 years to discount?

thisisbrianly

Here's another way to look at it.

Think of a perpetuity as an "ordinary perpetuity" (like an ordinary annuity). In an OA, there's always a one period offset between the first payment and the PV (i.e. if the first payment occurs in one year's time, the PV is "as of today", and nif it occurs in two year's time, the PV would be "as of year 1).

So, if the first payment occurs in 4 years, the PV of the Perputuity would be as of year 3. Therefore, you discount for 3 periods.

pogo

optiix Wrote:
-------------------------------------------------------
> I see big confusion here. Let's make it clear.
> Perpetuity starts at the end of the 4 year, but we
> have to discount with N = 3 because perpetuity
> formula would find value ot the perpetuity at the
> end of year 3. This is the same as with simplest
> perpetuity, which starts at the end of first year
> and we find the value of perpetuity at the time 0
> by using perpetuity formula. And time 0 is one
> period earlier than the end of 1 year (when
> perpetuity starts). This is crucial.

Actually it starts 4 years from now, meaning at the end of year 3 ( now is year 0)

shootingstar

optiix Wrote:
-------------------------------------------------------
> I see big confusion here. Let's make it clear.
> Perpetuity starts at the end of the 4 year, but we
> have to discount with N = 3 because perpetuity
> formula would find value ot the perpetuity at the
> end of year 3. This is the same as with simplest
> perpetuity, which starts at the end of first year
> and we find the value of perpetuity at the time 0
> by using perpetuity formula. And time 0 is one
> period earlier than the end of 1 year (when
> perpetuity starts). This is crucial.

Actually it starts 4 years from now, meaning at the end of year 3 ( now is year 0)

bluejazzy

i think i get this now. thanks very much to the people who contributed

rkapoor

I see big confusion here. Let's make it clear. Perpetuity starts at the end of the 4 year, but we have to discount with N = 3 because perpetuity formula would find value ot the perpetuity at the end of year 3. This is the same as with simplest perpetuity, which starts at the end of first year and we find the value of perpetuity at the time 0 by using perpetuity formula. And time 0 is one period earlier than the end of 1 year (when perpetuity starts). This is crucial.

cchang

I think some ppl are mixing up between an annuity due, and a regular annuity.

Four years from today is an Annuity Due

( N=4, iff your calc in BGN mode in TI Calc).
(N=3, iff your calc in END mode in TI Calc).



No other difference, will yield the same result.

ramdabom

i'm pretty sure max is correct, but as is evident from my other post, my brain is fried from the past multiple hours of studying

spartanag07

What are we upto? I see DS stepped back. What about others? 3 or 4?

smartpants

tried to delete my posts but can't....didn't really read the question right, and my answer was obviously wrong.........sorry