Final answer:
The present value of a bond is subject to change based on market interest rates. For a $3,000 bond with an 8% annual interest, the present value equals its face value if discounted at the same rate. A rise in the discount rate decreases the bond's present value, as seen with a market value drop to $2,400 in higher interest conditions.
Step-by-step explanation:
The scenario you're describing involves an understanding of the present value of the bond, a fundamental concept in finance. Given a two-year bond with a principal of $3,000 and an 8% annual interest rate, the bond will pay $240 in interest each year.
If the discount rate is also 8%, the present value of this bond is equal to its face value - $3,000. However, if the market conditions change and the discount rate rises to 11%, the market value of the bond will be less than the face value because future cash flows are discounted back at a higher rate, reducing their present worth.
To calculate the present value at different discount rates, you apply the present value formula to both the annual interest payments and the principal to be received at the end of the two years. These calculations ensure that you understand the effects of changing interest rates on bond valuation.
In the case of your question, although the face value of the note is $3,000, market conditions have deemphasized its value to $2,400, reflecting higher market interest rates and thus a higher discount applied to its future cash flows.