The main difference between annuity and perpetuity is that the present value of a perpetuity is calculated using a formula that assumes a perpetual stream of equal payments whereas the present value of an annuity is calculated using a formula that takes into account the fixed term of the payments.
Before we move to more differences, let’s first understand Annuity and Perpetuity:
- Annuity: An annuity is a financial product that provides a series of fixed payments over a specific period of time. These payments can be made monthly, quarterly, annually, or at some other interval.
- Perpetuity: A perpetuity is a financial product that provides a series of fixed payments that continue indefinitely. In other words, there is no set end date for the payments.
Now, let’s get to Annuity vs Perpetuity:
Major differences between Annuity and Perpetuity
|The total number of payments in an annuity is finite.||The total number of payments in a perpetuity is infinite.|
|An annuity is typically used for a specific purpose, such as funding retirement or paying off a mortgage.||A perpetuity can be used for a wide range of purposes.|
|An annuity has a set end date.||A perpetuity continues indefinitely.|
|An annuity has a fixed term.||A perpetuity has no fixed term and provides payments indefinitely.|
|An annuity can be structured to provide level payments, increasing payments, or decreasing payments over the term of the contract.||A perpetuity typically provides level payments.|
So, these are the main differences between the entities.
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