EQUATION VALUE

An equation value is obtained by setting the sum of the values on a

certain comparison or focal date of one set of obligations equal to the
sum of the values on the same date of another set of obligations.
EXAMPLE:1
A man bought a lot worth P1,OOO,OOO if paid in cash. On the
installment basis, he paid a down payment of P2oo,ooo, P3oo,ooo at
the end of one year, P4oo,ooo at the end of 3 years and a final
payment at the end of five years. What was the final payment if interest
was 2o%. ANS: P792,576
EXAMPLE 2.
In return for a promise to receive P600 at the end of 8 years, Roger
agrees to pay P100 at once,P200 at the end of 5 years, and to make a
further payment X at the end of 10 years. Assume that the nominal rate
of interest is 8% convertible semiannually. ANS. P186.76
EXAMPLE 3:
At what effective rate of interest will the present value of the
investment consisting of P2000 deposited at the end of 2 years and
P3000 deposited at the end of four years be equal to P4000? ANS. i =
0.073.
 CONTINOUS COMPOUNDING AND DISCRETE
PAYMENTS
In discrete compounding, the interest is compounded at the end of
each finite – length period, such as month, a quarter or a year.
In continuous compounding, it is assumed that cash payments occur
once per year, but the compounding is continuous throughout the years.
Formula for Continues Compounding:
F=P
P=F
where: F = future value
P = Present value
r = nominal rate
n = number of years
 Example
1. Compare the accumulated amounts after 5 years of P1,OOO
invested at the rate of 1O% per year compounded [a] annually, [b]
semi-annually, [c] quarterly, [d] monthly, [e] daily, and [f]
continuously.
ANS: [a] F = P1,61O.51
[b] F = P1,628.89
[c] F = P1,638.62
[d] F = P1,645.31
[e] F = P1,648.61
[f] F = P1,648.72
 DISCOUNT
Discount on a negotiable paper is the difference between the
present worth (the amount received for the paper in cash) and the
worth of the paper at some time in the future (the face value of the
paper or principal). Discount is the interest paid in advance.
Discount = Future Worth – Present worth
The rate of discount on one unit of principal for one unit of time
O 1

P 1.OO
Rate of Discount
d=1– =

i=

where:
d = rate of discount for the period involved
I = rate of interest for the same period
 EXAMPLES
1. A man borrowed P5,OOO from a bank and agreed to pay the loan at
the end of 9 months. The bank discounted the loan and gave him
P4,OOO in cash. [a] What was the rate of discount? [b] What was
the rate of interest? [c] What was the rate of interest for one year?
ANS: [a] d= O.2O% [b] i = 25% [c] i = 33.33%
2. Mr. J de la Cruz borrowed money from a bank. He received from the
bank P1,342 and promise to repay P1,5OO at the end of 9 months.
Determine the simple interest rate and the corresponding discount
rate or often referred to as the “bankers discount”. ANS: 11.7%, 1O.53%
 INFLATION
Inflation is the increase in the prices for goods and services from
one year to another thus decreasing the purchasing value power of
money.
FC = PC

where: PC = present cost of commodity

FC = future cost of the same commodity
f = annual inflation rate
n = number of years
 In an inflationary economy, the buying power of money decrease as
costs increase. Thus :
F=
where:
F is the future worth measured in todays pesos of the present
amount P

If interest is being compounded at the same time that inflation is

occurring, the future worth will be:
F=P=P(
 EXAMPLES
1. An item presently costs P1,OOO. If the inflation is at the rate of 8%
per year what will be the cost of the item in two years?
ANS: FC = P1,166.4O
2. An economy is experiencing inflation at an annual rate of 8%. If this
continues, what will P1,OOO be worth two years from now in terms of
todays pesos? ANS: F = P857.34
3. A man invested P1O,OOO at an interest rate of 1O% compounded
annually. What will be the final amount of his investment in terms of
todays pesos, after five years, if the inflation remains the same at the
rate of 8% per year? ANS: F = P1O,96O.86
 ASSINGMENT
1. A man borrowed P3,5OO to be paid after 1 years with interest at
12% compounded semi-annually and P5,5OO to be paid after 3
years at 12% compounded monthly. What single payment must she
pay after 3 ½ years at an interest rate 16% compounded quarterly to
settle the two obligations?
• Mr. J. de la Cruz borrowed money from a bank. He received from the
bank P1,35O and promise to repay P1,6OO at the end of 9 months.
Determine the simple interest rate and the corresponding discount
rate or often referred to as the “Bankers Discount”.
• A man depositsP6O,OOO in a bank account at 6% compounded
monthly for 5 years. If the inflation rate of 6.6 % per year continues
for this period, will this effectively protect the purchasing power of
the original principal?