Final answer:
When a zero-interest-bearing note is issued, the borrower receives the present value of the note, which is the amount they receive up front and is less than the face value of the note to be repaid at maturity.
Step-by-step explanation:
When a zero-interest-bearing note is issued, the borrower receives the present value of the note. This amount represents the cash received up front by the borrower. To understand this better, consider that the present value is the current worth of a future sum of money or stream of cash flows given a specified rate of return.
Unlike typical bonds that have coupon rates and pay interest periodically, a zero-interest-bearing note does not pay interest over time but is instead sold at a discount to its face value, which is the amount to be paid at maturity. This means the borrower gets less than the face value initially, but repays the full face value when the note comes due. The initial amount, or present value, is calculated based on the face value, considering the market interest rates and the time until maturity.