Final answer:
The discussion centers on the calculation of future value and present value of bonds using compound interest and presents value formulas, respectively. It demonstrates how the value of a bond changes with fluctuating discount rates, emphasizing the inverse relationship between bond prices and interest rates.
Step-by-step explanation:
The concept being discussed is compound interest, which is a type of interest calculated on the initial principal of an investment as well as on the accumulated interest over previous periods. When calculating the future value of bonds using the compound interest formula, you find it by multiplying the principal by the growth factor, which is (1 + interest rate) raised to the power of time.
The difference between the future value and the present value of the principal gives you the compound interest. To calculate the present value of a two-year bond issued for $3,000 at an interest rate of 8% and to reassess its value if the discount rate changes, we apply the present value formula.
With a discount rate of 8%, the calculations will provide us with the current worth of the future payments to be received from the bond. If the discount rate rises to 11%, the present value of the bond would decrease, demonstrating the inverse relationship between discount rates and bond prices.