Perpetuity question

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sgupta0827

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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?
 
Can’t help you, buddy, until you post more details. CFA material is tricky when it comes to discounting periods. You have to be very careful when reading between the lines - trigger phrases usually include things like “beginning of the ending period,” “payments starting next year,” etc. So you may read it as being four periods, when it actually is three periods.
 
Everything is ok here. If perpetuity starts 4 yrs from now, then you have to discount using N = 3 in order to find present value.
 
optiix Wrote:
——————————————————-
> Everything is ok here. If perpetuity starts 4 yrs
> from now, then you have to discount using N = 3 in
> order to find present value.
Hi Optix, Could you tell us the reason why should you have 3 rather than 4?
 
sgupta0827 Wrote:
——————————————————-
> optiix Wrote:
> ————————————————–
> —–
> > Everything is ok here. If perpetuity starts 4
> yrs
> > from now, then you have to discount using N = 3
> in
> > order to find present value.
>
>
> Hi Optix, Could you tell us the reason why should
> you have 3 rather than 4?
If it starts 4 years from today, that is the same as it starting at the end of year 3, which is why you would use N=3 instead of 4.
 
Pretty much what Oyster said as well, ‘four years from today’ is the same as ‘at the end of year three’
Hope it helps
 
ok maybe I’m totally losing the plot here, but I can’t see how “four years from today” is the same as “at the end of year three”. I’ve drawn a timeline and everything.
I agree that the fourth year STARTS at the end of year three, but “”four years from today” means there has to be four completed years, right?
 
Kiakaha Wrote:
——————————————————-
> ok maybe I’m totally losing the plot here, but I
> can’t see how “four years from today” is the same
> as “at the end of year three”. I’ve drawn a
> timeline and everything.
>
> I agree that the fourth year STARTS at the end of
> year three, but “”four years from today” means
> there has to be four completed years, right?
Yes, you are right.
say the perpetuity starts 4 years from now, when you use the formula to calculate the value of this Perpetuity, the formula gives you the value at the begining of year 3( that is 3 years from now) ( this is contrast to annuity due if you can recall)
So if you discount N=3, the present value would be at the begining of year 0 , or now.
 
tried to delete my posts but can’t….didn’t really read the question right, and my answer was obviously wrong………sorry
 
What are we upto? I see DS stepped back. What about others? 3 or 4?
 
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
 
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.
 
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.
 
i think i get this now. thanks very much to the people who contributed
 
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)
 
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)
 
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.
 
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