Final answer:
A noninterest-bearing note does not pay periodic interest; instead, it is issued at a discount from its face value, with the difference representing the interest. It is repaid at maturity for the full face value, simplifying the borrowing process as companies don't make regular interest payments. This financing method is often used for short-term needs and can vary by company size and type of financing required.
Step-by-step explanation:
A noninterest-bearing note is essentially a form of debt that does not explicitly pay interest. Instead, interest is included in the original issue price of the note, which is discounted from the face value that the issuer will repay at maturity. The discount on the note serves as the interest that the issuer would otherwise pay during the life of the note. For example, if a company issues a noninterest-bearing note for $9,000 that is set to mature in one year at a face value of $10,000, the $1,000 difference represents the interest earned by the lender.
This type of financing is often used by businesses that need short-term funding. Since the interest is embedded in the cost of the note, the business does not have to make periodic interest payments. Upon maturity, the entire face value is paid to the lender. This can simplify the borrowing process and accounting, as there are no recurring interest calculations or payments required.
Companies choose their financing strategies based on their size, credit history, and the specific conditions of the loan or financing they require. While bank borrowing is more personal and often suits smaller firms that can benefit from a customized approach, larger and well-established firms might prefer issuing bonds to raise capital for investments, pay off existing debts, or facilitate acquisitions.