On October 31, 2018, Simeon Builders borrowed $16 million cash and issued a 7-month, noninterest-bearing note. The loan was made by Star Finance Co. The stated discount rate is 8%. Sky's effective interest rate on this loan is:

Question

Quizplus · Accepted Answer

The effective interest rate on a noninterest-bearing note is higher than the stated discount rate because the discount is deducted upfront, reducing the actual amount of cash received, but the borrower must repay the full face value of the note. This results in a higher effective cost of borrowing.

On October 31, 2018, Simeon Builders Borrowed $16 Million Cash