A firm offers terms of 2.4/7, net 60. a. What effective annual interest rate doe

Question

A firm offers terms of 2.4/7, net 60.

a. What effective annual interest rate does the firm earn when a customer does not take the discount? (Use 365 days a year. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Effective annual interest rate %

b. What effective annual interest rate does the firm earn if the terms are changed to 3.4/7, net 60, and the customer does not take the discount? (Use 365 days a year. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Effective annual interest rate %

c. What effective annual interest rate does the firm earn if the terms are changed to 2.4/7, net 90, and the customer does not take the discount? (Use 365 days a year. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Effective annual interest rate %

d. What effective annual interest rate does the firm earn if the terms are changed to 2.4/12, net 60, and the customer does not take the discount? (Use 365 days a year. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Effective annual interest rate %

Explanation / Answer

a.THe interest rate for the term of discount is :

Interest rate = 0.024/0.976 = 0.024590163 i.e 2.4590163%

And the interest is for

60-7 = 53 days

So using the EAR equation the effective annual interest rate is

EAR = (1+Periodic rate)m - 1

EAR= (1+0.024590163)365/53 - 1

EAR = 1.1821073382-1

EAR = 0.1821073382 i.e 18.21%

b.

Interest rate = 0.034/0.966 = 0.035196687

60-7 = 53 days

EAR = (1+0.035196687)365/53- 1

EAR = 1.2689935402-1

EAR= 0.2689935 i.e 26.90%

c.

Interest rate = 0.024/0.976 = 0.024590163

No of days = 90-7 = 83 days

EAR = (1+0.024590163)365/83 - 1

EAR = 1.1127443002 - 1

EAR = 0.1127443002 i.e 11.27%

d.

Interest rate = 0.024/0.976 = 0.024590163

No of days = 60-12 = 48 days

EAR= (1+0.024590163)365/48- 1

EAR = 1.2028884139-1

EAR = 0.2028884139 i.e 20.29%

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