On April 31,2016,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 is the rate used to calculate the discount on the face value of the note to determine the amount of cash received by the borrower. In this case, the borrower received $10 million but will have to repay a higher amount at maturity to reflect the 10% effective interest rate. Therefore, the stated discount rate must be lower than the effective interest rate to account for this difference. Thus, the correct option is B, less than the effective interest rate.

On April 31,2016,Elkhorn Associates Borrowed $10 Million Cash from Colonial