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Equation Of Value

A sum of money has different values at different times. Let a non-interest-bearing debt of Rs. x be due at some specified time. Its value at the due date is of course x. If not paid at that time and if money is worth i per period, the value of the debt n periods after the due date is more than x and is found by multiplying x by (1+ i)n. But its value n period before the due date is less than x and is found by multiplying x by (1+ i)-n.

An equation of value is an equation which states that the sum of the values on a given date, of one set of obligations is the same as the sum of the values, on this same date, of another set of obligations. Any date chosen for comparing the values of two sets of obligations is called the comparison date or focal date.

Note. It is important to note that, if two sets of obligations have equal values on one date, they will have equal values on any others date, provided compound interest is used and rate of interest is same for each obligations.

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