The Difference in Computing the Effective Interest Rate for Non-Interest-Bearing

question 29

Multiple Choice

The difference in computing the effective interest rate for non-interest-bearing obligations as compared to installment obligations is

• A) one has an interest rate of zero, while the other is determined using present value factors.
• B) one uses the 'present value of a single sum' table and the other uses the 'present value of an ordinary annuity' table.
• C) one is based on the market rate of interest, while the other is based on a stated rate of interest.
• D) determined by the length of the debt maturity period.

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Definitions:

Corporate Bonds

Debt securities issued by corporations to raise capital, with the promise to repay the principal along with interest on specified dates.

Call Provision

Right of the issuer to buy a bond back from the investor before maturity at a specified price.

Interest Rate

The percentage of a sum of money charged for its use, often expressed as an annual percentage.

Mortgage Pass-Through

A type of security that pools mortgage loans and passes the principal and interest payments from borrowers to investors.