What happens to the implied interest rate on trade credit as the time interval between the discount period and payment period is decreased?
A) The rate declines.
B) The rate increases.
C) The rate remains constant.
D) It is impossible to predict without knowing the actual length of discount period.

Question

Quizplus · Accepted Answer

The implied interest rate on trade credit increases as the time interval between the discount period and payment period is decreased. This is because the buyer has less time to pay and thus there is a higher cost of financing the outstanding balance. Therefore, the seller may offer a lower discount rate to compensate for the higher implied interest rate.

What Happens to the Implied Interest Rate on Trade Credit