When the stated interest rate is lower than the effective interest rate for a long-term note...
When the stated interest rate is lower than the effective interest rate for a long-term note receivable, the note is issued at
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a value that reflects an average of the stated and effective interest rates. |
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a premium. |
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face value. |
|
a discount. |
Homework Answers
Answer
- Correct Answer = Option #4: When the stated interest rate is lower than the effective interest rate, the note is used at a DISCOUNT.
- This is simply because no one will take those notes at Face value if they are getting interest rate LOWER than what’s prevailing as effective rate.
- In order to make the note attractive to be accepted, the issuer issues it at a Discount.
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