Zero Interest Bearing Note Example [Video]

A company that issues a zero-interest-bearing note doesn’t make periodic interest payments. Instead, the company agrees to receive less cash than the note’s face value. The difference between the amount of money received and the amount of money the issuer of the note is promising to pay is called the discount. The discount represents implicit interest on the note.

To calculate the amount of cash the issuer will receive for the note, discount the face value of the note (the amount the issuer is promising to pay) to its present value. The discount rate used to perform the calculation is the implicit interest rate for the note.

At the end of each period, the issuer of the note would multiply the note’s carrying value by the implicit interest rate to calculate the interest expense for that period.
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