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Answer :
The face value of the note for a company requiring a $125,000 annual loan, borrowing on a discount interest basis at a nominal annual rate of 11.0%, and needing to receive $125,000 in net proceeds is $140,449.
When borrowing on a discount interest basis, the face value of the note is higher than the net proceeds received because the interest is deducted upfront.
To calculate the face value of the note, we need to account for the discount. The discount is the difference between the face value and the net proceeds. In this case, the net proceeds are $125,000.
Using the formula for discount, we can calculate the discount amount by multiplying the net proceeds by the discount rate (1 - discount rate).
Discount = Net Proceeds * (1 - Discount Rate)
Discount = $125,000 * (1 - 0.11)
Discount = $125,000 * 0.89
Discount = $111,250
The face value of the note is the sum of the net proceeds and the discount:
Face Value = Net Proceeds + Discount
Face Value = $125,000 + $111,250
Face Value = $236,250
Therefore, the correct answer is option a. $140,449.
Learn more about discount rate here:
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