A Chinese exporter sells $200,000 of toys to a French importer. The Chinese exporter requires the French importer to obtain a letter of credit. When the bank accepts the draft,the exporter discounts the 90-day note at a 4 percent discount. What is the exporter's true effective annual financing cost?

Question

Quizplus · Accepted Answer

The financing cost can be calculated using the discount rate and the time period for which the note is discounted.

Discount amount = $200,000 x 4% x (90/360) = $2,000 
Net proceeds to the exporter = $200,000 - $2,000 = $198,000

The true effective annual financing cost can be calculated using the following formula:

[(Discount amount / Net proceeds) x (360 / time period)] x 100%

= [(2,000 / 198,000) x (360 / 90)] x 100% 
= 4.16%

Therefore, the best choice is D) 4.16%.

A Chinese Exporter Sells $200,000 of Toys to a French