Certified Management Accountant Practice Exam 2025 - Free CMA Practice Questions and Study Guide

Question: 1 / 430

What characterizes a discounted loan?

Requires interest to be paid at the end of the term.

Requires interest to be paid at the beginning of the loan term.

A discounted loan is characterized by the requirement that interest is deducted upfront from the principal amount before the borrower receives the funds. This means that the borrower receives less than the face value of the loan because the interest is taken out at the beginning. For instance, if a borrower takes out a loan of $10,000 at a 5% interest rate for one year, the lender might deduct $500 in interest upfront, disbursing only $9,500 to the borrower.

This structure creates an effective interest rate that might be perceived as higher than standard loans, as borrowers pay interest on the full loan amount while receiving a reduced amount upfront. Because of this upfront interest deduction, the lender effectively earns interest on the entire loan amount even though the borrower only receives a lesser sum. Therefore, option B accurately captures this essential characteristic of a discounted loan.

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Has a lower effective interest rate than standard loans.

Involves collateral for loan security.

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