Final answer:
The question involves calculating the present value of future payments using the concept of the time value of money. It requires discounting future payments at the applicable interest rate to determine their worth in today's terms and summing them up for a total present value.
Step-by-step explanation:
The student's question pertains to the concept of present value in finance, where we are asked to calculate the present value of a $5,000 payment to be received at the end of each year for eight years, at an interest rate of 12 percent.
To calculate the present value of a future payment, we use the formula:
Present Value = Future Value / (1 + Interest Rate)number of years t
Applying this formula, we discount each of the $5,000 payments individually for each year they are received and sum them to get the total present value. This takes into account the time value of money, which posits that receiving money today is worth more than the same amount received in the future, because of the potential earning capacity.
For example, using the details provided in the context of a two-year bond issued for $3,000 with an 8% interest rate, if we want to find the present value of the bond with an 8% discount rate, we would discount the interest payments and the principal repayment by the same 8% to get their present values and then sum them up.
If the interest rates were to rise, and the applicable discount rate is 11%, we would adjust the formula with the new discount rate but follow the same steps to get the new present value.