Question

Which of the following statements regarding notes payable issued at a 0% interest rate is true?...

Which of the following statements regarding notes payable issued at a 0% interest rate is true?
a) The issuer of the note will not recognize any interest expense.
b) A 0% interest rate indicates that the interest expense is recognized at the end of the term of the note payable.
c) Interest expense is calculated using market rates of similar debt instruments over the term of the note.
d) The note payable is recognized at face value on date of issuance.

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Answer #1

Answer: “(c) Interest expense is calculated using market rates of similar debt instruments over the term of the note.”

This is because the market rate is recognized for the issuing price of the Note. The face value of the Note is discounted at the market rate to calculate the Issue price. The difference of value between the face value and the cash received denotes the discount or notional interest on the issue price. This discount would be amortized over the life years of the notes.

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