Final answer:
Bond valuation is done by calculating the present value of future cash flows; a bond issued at $3,000 with 8% interest will vary in present value based on the discount rate used. With a market rate of 12%, a bond paying $1,080 in a year would be priced at no more than $964.
Step-by-step explanation:
The valuation of a bond involves determining the present value of its future cash flows discounted at the appropriate rate. Considering a two-year bond with a face value of $3,000 and a coupon interest rate of 8%, the annual interest payment will be $240. Under an 8% discount rate, the present value of the first year's interest ($240) and the second year's combined payment of interest plus principal ($3,240) can be calculated using the present value formula. If the discount rate rises to 11%, the valuation will change since the starting point of these calculations is the future cash flows that the bond will generate.
For the second part of the question, when a bond's coupon rate is less than the market interest rate, the bond's price will fall below its face value to offer a yield that is comparable to the market rate. With a market interest rate of 12%, the buyer would not pay more than the $964 for a bond that is expected to pay $1,080 after one year, as this would align the yield with the market rate.