Final answer:
The value of bonds decreases when interest rates rise, as the present value of fixed future payments becomes lower when discounted at the higher rate.
Step-by-step explanation:
The scenario described involves the impact of changing interest rates on the present value of bond payments, which is a fundamental concept in finance. When interest rates increase from 8% to 11%, the fixed dollar payments determined by the original 8% rate stay the same, but the present value of these payments decreases because they are now discounted at the higher interest rate. Consequently, the market value of the bond decreases, making it less attractive to potential buyers. This illustrates the inverse relationship between interest rates and the value of bonds. Additionally, the risk of the borrower repaying the loan also affects the bond's price, which adds complexity to real-world calculations as the price is the present value of future expected payments.