Final answer:
An ordinary annuity and an annuity due differ in payment timing; the former has end-of-period payments while the latter has beginning-of-period payments. Bond valuation involves present value calculations, which are sensitive to interest rate changes. An increase in rates decreases the present value of future cash flows and, consequently, the bond's market value.
Step-by-step explanation:
The distinction between an ordinary annuity and an annuity due lies in the timing of the cash flows. An ordinary annuity assumes payments are made at the end of each period, whereas an annuity due assumes payments at the beginning. Real-world financial calculations, including the valuation of bonds, factor in various complexities such as changes in interest rates and credit risk. The value of an investment like a bond is essentially the present value of its future cash flows.
When interest rates increase, as demonstrated by a rise from 8% to 11%, the present value of the bond's future cash flows decreases, reflecting a lower price for the bond in the market. An investor selling the bond under these circumstances would likely incur a loss, as the investment's value has diminished despite the fixed dollar payments associated with the bond.
The present value is essential in understanding how the price of a bond is influenced by the market's interest rate and the inherent risk of the borrower's creditworthiness.