1. Suppose P85,000 is due at the end of 5 years with interest at 8% compounded quarterly.

If
money is worth 10% compounded semi-annually, what is the value of the obligation,

a) Now
b) At the end of 2 years
c) At the end of 6 years

Solution:

Given: P = 85,000
F=?
t = 5 years
j = 8%
m=4

F=P ( 1+ⅈ )n
= 85,000 ( 1+.08 )20
= P 126,305.53

P 85,000 P126,305.53
P F

0 1 2 3 4 5 6
P77,540.64 P94,251.13 P139,251.85

a) P=F ( 1+ ⅈ )−n
¿ 126,305.53 (1+.05 )−10
¿ 77,540.64 Now

b) P=F ( 1+ⅈ )−n

−6
¿ 126,305.53 (1+.05 )
¿ 94,251.13 At the end of 2 years

n
c) P=F ( 1+ⅈ )
¿ 126,305.53 (1+.05 )2
¿ 139,251.85 At the end of 6 years

In solving values of obligations, a time diagram is recommended to better understand and solve
their interrelationships. Furthermore, a focal date is suggested when comparisons are to be
made.

2.10 Equations of Values

In financial transactions, obligations are incurred for one reason or another. These obligations have to be
paid. They are generally paid on agreed specified dates. However, there are instances when obligations
are not easily settled. Given these situations, alternative payments are presented. To determine the
amount or amounts to be paid, these obligations and payments are related through a so-called equation
of value.