Solved: Terms of sale-effective annual interest rate, Finance Basics

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Terms of sale-effective annual interest rate

Problem: A firm offers terms of 1/10, net 30. What effective annual interest rate does the firm earn when a customer does not take the discount? Without doing any calculations, explain what will happen to this effective rate if:

1) The discount is changed to 2 percent.

2) The credit period is increased to 45 days.

3) The discount period is increased to 20 days.

4) What is the EAR for each scenario?

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Finance Basics: Terms of sale-effective annual interest rate

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