The principal of a non-interest-bearing note includes an implied interest cost.

Question

Quizplus · Accepted Answer

Even though a non-interest-bearing note does not have a stated interest rate, it still has an implied interest cost because the borrower is essentially borrowing money without paying interest upfront. The cost of not paying interest is reflected in the price or value of the note, which is typically lower than the face amount of the note. This lower price represents the cost of the interest that the borrower would have paid if the note had a stated interest rate.

The Principal of a Non-Interest-Bearing Note Includes an Implied Interest