Question

A store will give you a 2% discount on the cost of your purchase if you pay cash today. Otherwise, you will be billed the full price with payment due in 1 month. What is the implicit borrowing rate (EAR) being paid by customers who choose to defer payment for the month? Show your calcuation steps. If you use the financial calculator, tell me your inputs and output (i.e. pv,fv,n, i/Y, pmt). Please write equation and solve step by step.

Answer 1

Lets assume purchase price = 1
therefore discount =		0.02
Present value =		0.98
Future value =		1
Period =			1 month
Interst rate for 1 month computation
put in calculator
FV		1
PV		-0.98
PMT		0
N		1
Compute I	2.04%
EAR =		(1+2.04%)^12-1
		27.43%
Ans =		27.43%