An equation of value is a mathematical equality that equates the obligations to be paid on one side of the

equation and the respective payments on the other side. Sometimes, obligations are paid by single
payments or more payments. Again, a comparison date is chosen to serve as an objective and accurate
point of reference. The relationship between obligations and payments is shown by this equation:

Equation of Value :Obligations=Payments

Examples:

1. Mr. Darth Vader owes P12,000 due in two years at 8% compounded semi-annually and P10,000
due in 4 years. She decides to settle her obligations by a single payment on the third year. If
money is worth 12% compounded quarterly, how much is the single payment?

Solution:

Given: P1 = 12,000 F1 = ? t 1 = 2 years j 1 = 8% m1 = 2

P2 = 10,000 F2 = ? t 2 = 4 years
n
a) F 1=P1 (1+ i)
¿ 12,000(1+.02)4
¿ 12,989.19

b) F 2 = P10,000 since it is due at the end of 4 years with no interest. Hence,

P2=F 2 .

To determine the single payment to be made on the third year, we likewise use the third
year as the comparison date.

Referring to the time diagram, we need to accumulate F 1for one year and similarly,
discount F 2for one year at 12% compounded quarterly.

P12,989.19 P10,000

0 1 2 3 4
x
Single payment
Use as comparison date

Expressing as an equation of value, we have the following:

12,000(1+.02)4 +10,000(1+.03)−4 =x