Final answer:
Kansas Transports increased the total interest paid by discounting the note without recourse at a higher interest rate (12%) compared to the original rate (10%). This move results in accepting a lower amount for the note, increasing the effective cost of borrowing for Kansas Transports.
Step-by-step explanation:
When Kansas Transports decided to discount the note without recourse at the First South Bank at 12% interest on August 1, 2024, the impact of this decision was to increase the total interest paid by Kansas Transports. Discounting a note involves selling the debt to a third party at a reduced value before its maturity date. Since the discount rate of 12% offered by First South Bank is higher than the original interest rate of 10%, Kansas Transports would have to accept a lower amount for the note than its face value, accounting for both the original interest and the additional discount interest. Consequently, the overall cost to Kansas Transports, in terms of interest, goes up.
Consider a similar example where a two-year bond is issued for $3,000 with an 8% interest rate. If the prevailing market interest rate increases to 11%, and the bondholder wants to sell the bond before maturity, they will have to use a higher discount rate to calculate the present value, yielding less money than the bond's face value, hence incurring more cost relative to the initial interest rate.
If, for instance, a local water company issued a $10,000 bond at a 6% interest rate and you are considering buying it one year before maturity while the interest rates have risen to 9%, you would expect to pay less than $10,000 for the bond due to the interest rate increase.