Perpetuity and RFR: Difference between pages

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Risk-Free Rate.


The abbreviation 'RFR' usually refers to risk-free benchmark interest rates, such as SONIA.


== Fixed perpetuities ==
Also known as ''near'' risk-free rates, recognising that such rates are never entirely risk-free.


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.
Theoretically risk free rates of ''investment'' return, for example in the Capital asset pricing model, are more often designated by 'Rf' or 'rf'.


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
==See also==
*[[Capital asset pricing model]]
*[[O/N]]
*[[RFR WG]]
*[[Risk-free rate of return]]
*[[Risk-free rates]]
*[[SONIA]]


 
[[Category:Corporate_financial_management]]
where:
[[Category:Financial_products_and_markets]]
 
A<sub>1</sub> = Time 1 cash flow
 
r = periodic cost of capital
 
 
== 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 ==
* [[Annuity]]
* [[Dividend growth model]]
* [[Growing perpetuity]]
* [[Irredeemable]]
* [[Perpetuity due]]
* [[Perpetuity factor]]
* [[Simple annuity]]
* [[Growing annuity]]
 
[[Category:Corporate_finance]]
[[Category:Long_term_funding]]

Revision as of 12:29, 24 March 2019

Risk-Free Rate.

The abbreviation 'RFR' usually refers to risk-free benchmark interest rates, such as SONIA.

Also known as near risk-free rates, recognising that such rates are never entirely risk-free.


Theoretically risk free rates of investment return, for example in the Capital asset pricing model, are more often designated by 'Rf' or 'rf'.


See also