Question

Let r be the nominal discount rate in problem 25, and let s be the nominal discount rate in part (a). Prove, without reference to the future value and to the present value of the note, that s d 12 3 r 1 c r 4

Answer 1

The problem discusses calculating the present value of a two-year bond's future cash flows under different discount rates, demonstrating the inverse relationship between discount rates and present value.

Step-by-step explanation:

The subject of the given problem revolves around the concept of present value calculations for a bond under different discount rates. When considering a two-year bond worth $3,000 with an 8% annual interest, the yearly interest payment is $240. To determine the present value of this bond with an 8% discount rate, you would discount the two future cash flows (the interest payments and the principal repayment) to present value terms using the present value formula. However, if the discount rate increases to 11%, the present value of these future cash flows decreases, as they are discounted at a higher rate, showing the inverse relationship between discount rates and present value.