Calculate the effective annual interest rate of foregoing the discount and paying on the 50^thday when the terms are 3/15, n 50. Use a 365- day year.

Question

Quizplus · Accepted Answer

The effective annual interest rate (EAR) for foregoing the discount can be calculated using the formula for the cost of not taking the trade discount: EAR = [1 + (discount / (1 - discount))]^(365 / days past discount) - 1. Here, the discount is 3% (or 0.03), and the days past discount period are 50 - 15 = 35 days. Plugging the values into the formula gives EAR = [1 + (0.03 / (1 - 0.03))]^(365 / 35) - 1, which calculates to approximately 37.38%.

Calculate the Effective Annual Interest Rate of Foregoing the Discount