Final answer:
The question deals with the valuation of a non-interest-bearing promissory note and an interest-bearing promissory note. The value depends on the present value of expected cash flows, which is influenced by the interest rates in the market. Changes in interest rates affect the attractiveness and the pricing of these financial instruments.
Step-by-step explanation:
The question pertains to the valuation of two different financial instruments: a non-interest-bearing promissory note and an interest-bearing promissory note. For the first scenario with Metlock Inc., the company sold land for a four-year, non-interest-bearing promissory note where the land's carrying value was substantially less than the note's face amount. This raises questions about the present value of the note, given that there are no periodic interest payments.
For the second scenario involving an eight-year promissory note with a face value of $470,000 and an annual interest rate of 3%, the approach to valuation would be different. This note includes periodic interest payments, thereby affecting its present value calculation, especially if market interest rates change.
The additional information provided compares various bond scenarios to emphasize how interest rates impact the valuation of bonds and notes. For example, as interest rates rise, the present value of a bond's future payments generally decreases, and vice versa. Understanding these relationships is crucial in accounting for these types of transactions and assessing the risk associated with these financial instruments.
The final part of the supplied information gives an example of a two-year bond with an 8% interest rate. It walks through the process of calculating its present value at both an 8% and an 11% discount rate. The calculations clearly demonstrate the impact of changing discount rates on the present value of future cash flows.