Perpetuity and Pricing grid: Difference between pages

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imported>Doug Williamson
(Added additional broader definition. Source http://www.investopedia.com/terms/p/perpetuity.asp.)
 
imported>Doug Williamson
(Align with qualifications material CFF 4.2.2 page 8 Section 6.2.)
 
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1.
A clause in a loan document which links the pricing of the borrowing to the credit rating of the borrower.


An infinite amount of time, usually a constant stream of cash flows with no end.
Also known as a 'ratchet'.
 
 
 
2. '''Fixed perpetuities'''
 
A fixed perpetuity is a periodic cash flow starting one period in the future, then carrying on for ever - ‘in perpetuity’.
 
Each cash flow is an equal fixed amount.
 
The present value of a fixed perpetuity is calculated - assuming a constant periodic cost of capital (r) for all periods from now to infinity - as:
 
Present Value = A<sub>1</sub> x 1/r
 
 
where:
 
A<sub>1</sub> = Time 1 cash flow
 
r = periodic cost of capital
 
 
3. '''Growing perpetuities'''
 
For a growing perpetuity, the present value formula is modified to take account of the constant periodic growth rate from one period in the future to infinity, as follows:
 
Present Value = A<sub>1</sub> x 1 / (r - g)
 
where g = the periodic rate of growth of the cash flow.
 
 
The growing perpetuity concept is applied in many contexts.
 
For example, the Dividend growth model for share valuation.




== See also ==
== See also ==
* [[Annuity]]
* [[Credit rating]]
* [[Dividend growth model]]
* [[Ratings trigger]]
* [[Growing perpetuity]]
* [[Rating grid]]
* [[Irredeemable]]
* [[Perpetuity due]]
* [[Perpetuity factor]]
* [[Simple annuity]]
* [[Growing annuity]]


[[Category:Corporate_finance]]
[[Category:Treasury_operations_infrastructure]]
[[Category:Long_term_funding]]

Revision as of 16:34, 25 July 2015

A clause in a loan document which links the pricing of the borrowing to the credit rating of the borrower.

Also known as a 'ratchet'.


See also

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