Final answer:
The question involves finding the present value of future cash flows from a two-year bond at discount rates of 8% and 11%. The total present value at an 8% discount rate is $3,000, and it decreases to $2,840.95 when recalculated with an 11% discount rate, demonstrating the impact of discount rates on present value calculations.
Step-by-step explanation:
The question pertains to the calculation of the present value of future cash flows from a bond using a discount rate. In this case, the bond pays $240 after the first year and then $240 plus the principal amount of $3,000 after the second year. The present value of these cash flows can be calculated using the present value formula, which discounts future payments by a certain interest rate to determine their worth in today's dollars.
To calculate the present value at an 8% discount rate, the formula and steps provided in Table C2 are applied:
- First year's interest: $240 / (1 + 0.08) = $222.20
- Second year's interest and principal: $3,240 / (1 + 0.08)² = $2,777.80
- Total present value at 8% discount rate: $222.20 + $2,777.80 = $3,000
If the discount rate increases to 11%, the calculation needs to be adjusted with the new rate:
- First year's interest: $240 / (1 + 0.11) = $216.22
- Second year's interest and principal: $3,240 / (1 + 0.11)² = $2,624.73
- Total present value at 11% discount rate: $216.22 + $2,624.73 = $2,840.95
These calculations show how the present value decreases when the discount rate increases, which is a key concept in the time value of money and finance.