Question

Credit terms are often stated in the following manner: 1.5/10, net 30. This means that if you pay within 10 days, you can take a 1.5 percent discount on the price, else the full amount is due in 35 days. For example, if you buy $1,000 in goods, you can pay $985 within 10 days or pay $1,000 within 35 days. What is the APR and EAR on this arrangement if you do not take advantage of the discount

Answer 1

	The question gives at first 1.5/10 net 30, which means that
	payment is to be made by the 30th day if, discount is not
	availed of. But, after that it says payment is to be made
	by the 35th day. Hence, solution is given for both situations.
	If net is 30 days:
1]	The interest rate for 20 days = 1.5/98.5 =	1.52%
2]	APR = (1.5/98.5)*(365/20) =	27.79%
3]	EAR = (1+1.5/98.5)^(365/20)-1 =	31.76%
	If net is 35 days:
1]	The interest rate for 25 days = 1.5/98.5 =	1.52%
2]	APR = (1.5/98.5)*(365/25) =	22.23%
3]	EAR = (1+1.5/98.5)^(365/25)-1 =	24.69%