Question

Annual percentage yield​) Compute the cost of the following trade credit terms using the compounding​ formula, or effective annual rate. Note​: Assume a​ 30-day month and​ 360-day year.

a. 2​/5​, net 45

b. 4​/10​, net 30

c. 2​/10​, net 60

d. 4​/10​, net 30

Answer 1

(a)

2/5 net 45 means that take 2% discount if paid in 5 days, otherwise pay in 45 days

Effective interest rate = Discount %/(1-Discount %) x (360/(Full allowed payment days - Discount days))

= (0.02/(1-0.02)) * (360/(45 - 5))

= 0.1836 or 18.37%

(b)

4/10 net 30 means that take 4% discount if paid in 10 days, otherwise pay in 30 days

Effective interest rate = Discount %/(1-Discount %) x (360/(Full allowed payment days - Discount days))

= (0.04/(1-0.04)) * (360/(30 - 10))

= 0.75 or 75%

(c)

2/10 net 60 means that take 2% discount if paid in 10 days, otherwise pay in 60 days

Effective interest rate = Discount %/(1-Discount %) x (360/(Full allowed payment days - Discount days))

= (0.02/(1-0.02)) * (360/(60 - 10))

= 0.1469 or 14.69%

(b)

4/10 net 30 means that take 4% discount if paid in 10 days, otherwise pay in 30 days

Effective interest rate = Discount %/(1-Discount %) x (360/(Full allowed payment days - Discount days))

= (0.04/(1-0.04)) * (360/(30 - 10))

= 0.75 or 75%