Which of the following are characteristics of a perpetuity?

A. A perpetuity is a stream of unequal cash flows.

B. The value of a perpetuity is equal to the sum of the present value of its expected future cash flows.

C. The current value of a perpetuity is based more on the discounted value of its nearer (in time) cash flows and less by the discounted value of its more distant (in the future) cash flows.

D. The value of a perpetuity cannot be determined.

B. The value of a perpetuity is equal to the sum of the present value of its expected future cash flows.

C. The current value of a perpetuity is based more on the discounted value of its nearer (in time) cash flows and less by the discounted value of its more distant (in the future) cash flows.

Explanation:

A Perpetuity is a financial instrument that pays the holder forever or in perpetuity. For example, a bank paying you $800 per year for ever because you invested $40,000.

There are certain characteristics

Option B

The Perpetuity like most financial Securities has its value based on the underlying cashflows that it can accumulate. This means that it's value is based on the present value of it's future cashflow so the other the cash payments, the higher the present value.

Option C.

As the discounted cashflows in the nearer future will be discounted less by the discount rate as opposed to the cash flows further in future, the cashflows nearer to the present in time will contribute more to the Perpetuity than the cashflows further in time.

For example using that first example, $800 per year at a rate of 5% will be discounted to $762 in the first year but in year 10 will be discounted to $491.