Final answer:
The effective interest rate of a simple discount note determines the present value of a bond, which changes with fluctuations in prevailing interest rates. A bond's present value is calculated using the present discounted value of its expected payments. The example given uses a $3,000 bond with an 8% interest rate to illustrate how its value is affected by changes in the discount rate.
Step-by-step explanation:
The question pertains to the concept of the effective interest rate of a simple discount note, specifically within the context of finance and investment. To calculate the present discounted value of future payments from a bond, we need to apply the present value formula. Taking a two-year bond issued at $3,000 with an interest rate of 8%, we would anticipate annual payments of $240. The calculations involve discounting these future payments at the given discount rate to determine their present value.
When the discount rate is the same as the interest rate (8% in this case), the present value of the bond should theoretically equal its face value, because the market rate of return and the bond's return are the same. If the discount rate increases to 11%, the present value of the bond will decrease because the fixed interest payments are less attractive compared to the new higher rate available in the market. This calculation illustrates interest rate risk, where the value of a bond changes in response to fluctuations in prevailing interest rates.