A firm offers terms of 2.2/7, net 30. What effective annual interest rate does t

Question

A firm offers terms of 2.2/7, net 30.

What effective annual interest rate does the firm earn when a customer does not take the discount?(Use 365 days a year. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

What effective annual interest rate does the firm earn if the terms are changed to 3.2/7, net 30, and the customer does not take the discount? (Use 365 days a year. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

What effective annual interest rate does the firm earn if the terms are changed to 2.2/7, net 60, and the customer does not take the discount? (Use 365 days a year. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

What effective annual interest rate does the firm earn if the terms are changed to 2.2/12, net 30, and the customer does not take the discount? (Use 365 days a year. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

A firm offers terms of 2.2/7, net 30.

Explanation / Answer

Answer: a The interest rate for the term of the discount is:

Interest rate = 0.022/0.978

Interest rate = 0.0225 or 2.25%

And the interest is for: 30 – 7 = 23 days

So, using the EAR equation, the effective annual interest rate is:

EAR = (1 + Periodic rate) m – 1

EAR = (1.0225) 365/23 – 1

EAR = 0.4235 or 42.35%

Answer:b The periodic interest rate is:

Interest rate = 0.032/0.968

Interest rate = 0.0331 or 3.31%

And the EAR is:

EAR = (1.0331) 365/23 – 1

EAR = 0.6766 or 67.66%

Answer:c The periodic interest rate is:

Interest rate = 0.022/0.978

Interest rate = 0.0225 or 2.25%

And the EAR is:

EAR = (1.0225) 365/53 – 1

EAR = 0.1656 or 16.56%

Answer:d The periodic interest rate is:

Interest rate = 0.022/0.978

Interest rate = 0.0225 or 2.25%

And the EAR is:

EAR = (1.0225) 365/18 – 1

EAR = 0.5702 or 57.02%

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