How to Calculate the Interest Rates on Perpetuity

by C. Taylor

A perpetuity promises regular payments that continue forever. As an example, a broker might offer to sell a perpetuity, which offers annual payments forever. The term "forever" gets your attention, because you figure an infinite pay term would result in infinite money, but unfortunately, it doesn't work like that. Perpetuities have a present value, which represents how much they are actually worth in current dollars, based on the payment and interest rate. In the example, you can assume the price of the perpetuity is its present value, so coupled with the annual payment, you can reverse the normal formula to calculate the interest rate offered.

Talk to the individual selling the perpetuity and ask for the price and annual payment.

Divide the annual payment amount by the present value. As an example, if the perpetuity is selling for \$10,000 and offered \$500 per year, you would divide \$500 by \$10,000 to get 0.05.

Multiply this figure by 100 to convert into percentage format. In the example, the perpetuity offers a 5 percent interest rate.