Calculate the effective annual interest rate of foregoing the discount and paying on the 45^thday when the terms are 1/10, n 45. Use a 365 day year.

Question

Quizplus · Accepted Answer

The effective annual interest rate (EAR) can be calculated using the formula for the cost of not taking the trade discounts: EAR = [1 + (discount / (1 - discount))]^(365 / days past discount) - 1. Here, the discount is 1% (or 0.01), and the days past discount period is 35 (45-10). Plugging these values into the formula gives EAR = [1 + (0.01 / (1 - 0.01))]^(365 / 35) - 1, which calculates to approximately 11.05%.

Calculate the Effective Annual Interest Rate of Foregoing the Discount