Wednesday, March 24, 2010

Zero-Interest-Bearing Notes

How to do deal with a Note that is not issued at face value? Zero-Interest-Bearing Notes

Companies that receive zero-interest-bearing notes will hold it with a present value that is the cash paid to the issuer. At the time of purchase, the company knows both the future amount and the present value of the note. Therefore, it can compute the interest rate accurately.

This special interest rate is often referred to as the implicit interest rate. Companies record the difference between the future amount and the present value as a discount. The company must amortize this discount to interest revenue over the life of the zero-interest-bearing note. 

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