Final answer:
The present value of future cash inflows decreases as the interest rate used to discount them increases. A higher interest rate results in a more aggressive discounting of future cash flows, leading to a lower present value for the same future payments.
Step-by-step explanation:
When the interest rate used to discount future cash flows is increased, the present value of future cash inflows decreases. This is because the present value is calculated by discounting future cash flows back to their value today, which is done by applying the interest rate.
A higher interest rate means that future cash flows are discounted more aggressively, resulting in a lower present value. As a result, even if the future cash payments themselves do not change, their present value will be lower. Consequently, for someone attempting to sell an investment like a bond, the value of that investment will be lower as the interest rates increase.
If the interest rate rises from 8% to 11%, the actual cash payments remain the same, but their present value decreases because they are being discounted at a higher rate.