Final answer:
Interest on a 6-month $20,000 note with 8% annual interest is calculated as $800 using the formula Interest = Principal × rate × time. The value of a bond depends on the present discounted value of its future cash flows at a given discount rate, with higher rates leading to a decrease in value.
Step-by-step explanation:
To answer the student's question, the interest incurred on a 6-month, $20,000 note at a stated annual interest rate of 8% is calculated using the formula Interest = Principal × rate × time. For a period of 6 months, the calculation would be $20,000 × 0.08 × 6/12, resulting in an interest amount of $800.
Considering the example provided, when a simple two-year bond is issued for $3,000 at an 8% interest rate, it would pay $240 in interest each year. The present value of the bond at the discount rate of 8% would consider the present discounted value of all future cash flows, including interest payments and the principal repayment. When interest rates rise to 11%, the bond's value would decrease, as the future cash flows would be discounted at a higher rate. The present value calculation would therefore need to be adjusted to reflect the higher discount rate of 11%.