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Effective interest rate Will be________ than stated rate for non interest bearing notes. Why?

User GuiDupas
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Final answer:

The effective interest rate will be greater than the stated rate for non-interest-bearing notes because it takes into account the time value of money and compounding of interest. Non-interest-bearing notes do not earn interest, so the effective interest rate is higher to compensate for this.

Step-by-step explanation:

The effective interest rate will be greater than the stated rate for non-interest-bearing notes. This is because the effective interest rate takes into account the time value of money and the compounding of interest over time. Non-interest-bearing notes do not earn interest, so the effective interest rate is higher to compensate for the lack of interest earnings.

For example, let's say you have a non-interest-bearing note with a face value of $1,000 and a maturity period of 1 year. If the effective interest rate is 5%, the note would sell for less than $1,000 (at a discount) to compensate for the absence of interest.

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