Question

Find the effective annual rate of the following credit​ terms:

a.2.3​% discount if paid within 88 days or net within 30 days

b.1.1​% discount if paid within 35 days or net within 60 days

c.0.4​% discount if paid within 14 days or net within 45 days

d.0.8​% discount if paid within 23 days or net within 30 days

What is the effective annual rate of a 2.3​% discount if paid within 88 days or net within 30 ​days?

Answer 1

Answer a
The formula to calculate the effective annual interest rate in credit terms offered is as under,
effective annual interest rate = [Discount %/(1-Discount %)] x [365/(Full allowed payment days - Discount days)]
Discount % = 2.3%
Full allowed payment days = 88
Discount days = 30
effective annual interest rate = [0.023/(1-0.023)] x [365/(88 - 30)]
effective annual interest rate = 0.023541 x 6.293103
effective annual interest rate = 0.1481
effective annual interest rate = 14.81%
Answer b
The formula to calculate the effective annual interest rate in credit terms offered is as under,
effective annual interest rate = [Discount %/(1-Discount %)] x [365/(Full allowed payment days - Discount days)]
Discount % = 1.1%
Full allowed payment days = 60
Discount days = 35
effective annual interest rate = [0.011/(1-0.011)] x [365/(60 - 35)]
effective annual interest rate = 0.011122 / 14.60
effective annual interest rate = 0.00076
effective annual interest rate = 0.08%
Answer c
The formula to calculate the effective annual interest rate in credit terms offered is as under,
effective annual interest rate = [Discount %/(1-Discount %)] x [365/(Full allowed payment days - Discount days)]
Discount % = 0.4%
Full allowed payment days = 45
Discount days = 14
effective annual interest rate = [0.004/(1-0.004)] x [365/(45 - 14)]
effective annual interest rate = 0.004016 / 11.77419
effective annual interest rate = 0.000341
effective annual interest rate = 0.03%
Answer d
The formula to calculate the effective annual interest rate in credit terms offered is as under,
effective annual interest rate = [Discount %/(1-Discount %)] x [365/(Full allowed payment days - Discount days)]
Discount % = 0.8%
Full allowed payment days = 30
Discount days = 23
effective annual interest rate = [0.008/(1-0.008)] x [365/(30 - 23)]
effective annual interest rate = 0.008065 / 52.14286
effective annual interest rate = 0.000155
effective annual interest rate = 0.02%