Hello, I am working on the four homework problems below, but I am unsure of how
ID: 2795647 • Letter: H
Question
Hello, I am working on the four homework problems below, but I am unsure of how to solve them, please help me.
A firm offers terms of 1/10, net 35.
a.
What effective annual interest rate does the firm earn when a customer does not take the discount? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Effective annual interest rate %
b.
What effective annual interest rate does the firm earn if the discount is changed to 2 percent? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Effective annual interest rate %
c.
What effective annual interest rate does the firm earn if the credit period is increased to 55 days? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Effective annual interest rate %
d.
What effective annual interest rate does the firm earn if the discount period is increased to 15 days? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Effective annual interest rate %
Explanation / Answer
a) The interest rate for the term of the discount is:Interest rate = 0.01/0.99
Interest rate = 0.0101 or 1.01%
And the interest is for:35 – 10 = 25 days
So, using the EAR equation, the effective annual interest rate is
EAR = (1 + Periodic rate)^m– 1
EAR = (1.0101)^365/25– 1 = 0.1580 or 15.80%
b)
The periodic interest rate is = 0.02/0.98
Interest rate = 0.0204 or 2.04%
And the EAR is = (1.0204)^365/25– 1 = 0.3431 or 34.31
c) if credit period increases to 55,
EAR = (1.0101)^365/45– 1 = 0.0849 or 8.49%
d) if discount period is increased to 15
EAR = (1.0101)^365/20– 1 = 0.2012 or 20.12%
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