While annuity and perpetuities are all investments which pay individual money on a regular basis, they differ regarding their flexibility. Notably, annuities are more flexible where it can deliver money over a particular set of time to an individual choice in a lump sum. An annuity is a popular retirement tool in which initial investment is involved (Donald, 2016). It is always paid over a set period to the investor. There are two types of annuities in the market, the deferred annuity, and the immediate annuity.
On the other hand, perpetuities are slightly different since it is rigid and comes in full force. It is set to deliver the same amount of check to an individual’s mailbox for the remainder of their lives. Perpetuities are considered as never-ending payment flows and are a great investment especially when one requires a conservative financial vehicle (Chan & Rate, 2017). However, unlike the annuities, original investments are never refunded to the investors. Additionally, the investment never appreciates, and therefore the refunded money is likely to be less than the one which was invested. Examples of perpetuities include the long-dated bonds and preferred stock shares.
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Question #1
In the first web, there is a lot of helpful information. However, the most applicable information to the consumers or rather the investors is the savings for retirement. While many people invest for other basic needs and priorities, most investors prefer to save for their retirement. Such savings are necessary especially when one plans to have a smooth retirement period in his or her life. Consumers are always encouraged to consider such type of an investment.
Question #2
In the contemporary society, many investors have come to terms with the availability of policies such as the annuity. Its flexibility is perhaps an aspect that has made it famous among consumers. In the second web page, annuity appears to be information that is most applicable to the investors as well as the consumers.
Question #3
A perpetual bond is a simple example of perpetual policy in an insurance firm. The policy has no maturity date and is not redeemable. Perpetuity is structured like an annuity only that it has no end (Zhang, 2016). It begins with a fixed date and set to continue indefinitely. Its prices are said to be finite since the receipts anticipated in the future is considered lower than the current pricing. Because the principal is not repaid at any time, present value for the principal does not exist. Its formula is structured as follow,
PV=A/r
PV stands for the present value of the perpetuity, A is the amount of the periodic payment, and r is the yield.
In essence, one can tell that perpetuity is an annuity within a product because it consists all its structure only that it defers on the flexibility part as well as lack of an end within the policy.
Question #4
A series of payment made at an equal interval defines the property of annuity. They are paid at a regular deposit to a savings account. A life annuity is a common example which many investors prefer. It is structured in a way that the payments are made at the end of payment periods so that all the interest is accrued between the issue of the annuity and first payment. An annuity is often payable over the remaining lifetime of a specified annuitant. One can tell the presence of perpetuity within a product since the payment method of annuity is borrowed in perpetuity.
Question #5
Investors always consider some aspects before they invest their money towards a particular policy or business. The amount of recruiting revenue is an aspect that sets aside what should be invested by an investor or not. Many people would prefer a business that is revenue intensive. In acquiring policies, many investors prefer annuity in perpetuity since it is more flexible. Flexibility is certainly a factor to be considered by investors.
Question #6
Both products are calculated as per the investment accrued over time. However, unlike an annuity, perpetuity’s current price is slightly higher than the future payment. This means that the price of perpetuity always depreciates rather than appreciating over time.
Question #7
In case the investor has a shorter life expectancy, he or she is always advised to invest in bonds that come as perpetuity rather than taking life annuity.
Question # 8
A life annuity is a policy that is always preferred whenever the investor has a longer life expectancy. This is because, over time, his or her investment will increase and accrue more profits.
References
Chan, K., & Rate, E. A. I. (2017). & 6 The Time Value of Money. Financial Management.
Donald, D. W. A. (2016). Compound interest and annuities-certain. Cambridge University Press.
Zhang, C. (2016). Helping Students Crack Annuity, Perpetuity, Bond, and Stock Valuation Formulas.
