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A store will give you a 2% discount on the cost of your purchase if you...

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.

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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%
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