Final answer:
The total present value of a two-year bond with an 8% interest rate is $3,000.00, calculated by summing the present values of both the first-year interest payment and the combined second-year interest and principal payment using the present value formula.
Step-by-step explanation:
The question asks to calculate how much a two-year bond is worth in the present if the discount rate is initially 8% and then recalculated when the interest rates rise and the discount rate becomes 11%. To find the present value of the bond payments, we apply the present value formula.
For an 8% interest rate, the present value of the first year's interest payment of $240 is $240 divided by (1+0.08), which equals $222.20. The payment after the second year is $3,240, which includes both the principal and the interest.
The present value of this second payment is $3,240 divided by (1+0.08)², which equals $2,777.80. Summing up the present values of both payments, we get $222.20 + $2,777.80 = $3,000.00, which is the total present value of the bond at an 8% discount rate.