Which of the following statements is correct?
A) There is no interest included in a zero-interest-bearing note.
B) A long-term note's fair value and present value are always the same.
C) All notes contain an interest element because of the time value of money.
D) A note is signed by the payee in favour of the maker.

Question

Quizplus · Accepted Answer

The time value of money refers to the fact that a dollar received today is worth more than a dollar received in the future due to the earning potential of the money. Therefore, even if a note is zero-interest-bearing, it still contains an interest element because the payee is foregoing the opportunity to use that money elsewhere until the note is paid. Option A is incorrect because zero-interest-bearing notes still have a time value of money element. Option B is incorrect because the fair value and present value of a long-term note can differ depending on market conditions and other factors. Option D is incorrect because a note is typically signed by the maker in favour of the payee, not the other way around.

Which of the Following Statements Is Correct