Question

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:

a. More than the effective interest rate.
b. Less than the effective interest rate.
c. Equal to the effective interest rate.
d. Unrelated to the effective interest rate.

Answer 1

b. Less than the effective interest rate

Step-by-step explanation:

The stated discount rate on this loan is Less than the effective interest rate

As the note is noninterest-bearing note, the stated discount rate on this loan is less than the effective interest rate.