A firm offers terms of 2/7, net 60. a. What effective annual interest rate does

Question

A firm offers terms of 2/7, 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 3/7, 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 2/7, net 75, 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 2/12, 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

Answer:a The interest rate for the term of the discount is:

Interest rate = 0.02/0.98

Interest rate = 0.0204 or 2.04%

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 = (1.0204) 365/53 - 1

EAR = 14.92%

Answer: b: The periodic interest rate is:

Interest rate = 0.03/0.97

Interest rate = 0.0309 or 3.09%

And the EAR is: EAR = (1.0309) 365/53 - 1

EAR =23.32%

Answer:c: The EAR is:

EAR = (1.0204) 365/68 - 1

EAR =11.45%

Answer:d: The EAR is:

EAR = (1.0204) 365/48 - 1

EAR =16.60%

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