Calculate the effective annual interest rate of foregoing the discount and paying on the 60^thday when the terms are 2/cash, n 60. Use a 365- day year.

Question

Quizplus · Accepted Answer

The effective annual interest rate (EAR) for foregoing a discount can be calculated using the formula: EAR = [1 + (discount rate / (1 - discount rate))]^(365 / days past discount) - 1. Here, the discount is 2% (0.02), and the discount period is 10 days (60 days total minus 50 days to take advantage of the discount). Plugging the values into the formula gives: EAR = [1 + (0.02 / (1 - 0.02))]^(365 / 50) - 1, which calculates to approximately 13.08%.

Calculate the Effective Annual Interest Rate of Foregoing the Discount