On January 1, 2021, Red, Inc. borrowed cash by issuing a $500,000, 5-year note that specified 6% interest to be paid on December 31 of each year and the $500,000 to be paid at maturity. If the note had instead been an installment note to be paid in four equal payments at the end of each year beginning December 31, 2021, which of the following would be true?

On January 1, 2021, Red, Inc. borrowed cash by issuing a $500,000, 5-year note that specified 6% interest to be paid on December 31 of each year and the $500,000 to be paid at maturity. If the note had instead been an installment note to be paid in four equal payments at the end of each year beginning December 31, 2021, which of the following would be true?

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On January 1, 2021, Red, Inc. borrowed cash by issuing a $500,000, 5-year note that specified 6% interest to be paid on December 31 of each year and the $500,000 to be paid at maturity. If the note had instead been an installment note to be paid in four equal payments at the end of each year beginning December 31, 2021, which of the following would be true?



A) The effective interest rate would have been higher.

B) The annual cash payment would have been less.

C) The first year's interest expense would have been higher.

D) The second year's interest expense would have been less.


Answer: D


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