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

Answer:-

APR:- APR stands for Annual Percentage rate which refers to the periodic interest rate for a loan, multiplied by the number of payment periods each year. APR shows true cost of borrowing money.

For example- Adam purchases goods at credit at the rate of 2% per month, then it will give a nominal APR of 12% in a year.

EAR:- EAR stands for Effective annual percentage which refers to effects of compound interest and is useful for evaluating loans that compound interest at regular intervals such as montly or daily.

In example given in question, APR calculation is:-

Rate is 1.5% (monthly)

18% (yearly)

Goods cost= $1,000

APR = Monthly = $1000 * 1.5% = $15

Yearly = $1000 * 18% = $180

Calculation of EAR-

Effective Rate = 1.5104% (monthly)

= 19.7083% (yearly)

EAR = (Monthly) = $1000* 1.5104% = $15.104

= (Yearly) = $1000* 19.7083% = $197.083