On April 31, 2018, Elkhorn Associates borrowed $10 million cash from Colonial Bank and issued a 5-month, noninterest-bearing note, priced to yield an effective interest rate of 10%. The stated discount rate on this loan is:

Question

Quizplus · Accepted Answer

The stated discount rate on a noninterest-bearing note is typically less than the effective interest rate because the discount is calculated on the face value of the note, whereas the effective interest rate reflects the actual cost of borrowing based on the present value of the note's future payments.

On April 31, 2018, Elkhorn Associates Borrowed $10 Million Cash