When a company discounts an interest-bearing note at a bank with recourse
A)the company is assured payment at maturity.
B)the company will receive the full amount of the note plus interest.
C)the company has a contingent liability from the time the note is discounted until its maturity date.
D)the bank assumes the credit risk on non-payment at the maturity date.

Question

Quizplus · Accepted Answer

When a company discounts an interest-bearing note at a bank with recourse, it means that the bank can demand payment from the company if the borrower (maker of the note) fails to pay at maturity. Therefore, the company has a contingent liability from the time the note is discounted until its maturity date. The bank does not assume the credit risk of non-payment at maturity, so option D is incorrect. Option A is not necessarily true, as the company may still be liable even if the bank is assured payment. Option B is also not true, as the company will receive only the present value of the note at the time of the discount, not the full amount plus interest.

When a Company Discounts an Interest-Bearing Note at a Bank