Question

A store will give you a 1.25% 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 being paid by customers who choose to defer payment for the month? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

Discount= 1.25% or   0.0125
cash Payment is immediately made to avail discount. So Discount time =    0 month
Payment time = 1 month

Cost of trade credit foumula or implicit borrowing rate = Discount%/(1-Discount%)*12/(Payment month - discount month)  
0.0125/(1-0.0125)*12/(1-0)  
0.1518987342   or 15.19%
  
So, Cost of trade credit or implicit borrowing rate is 15.19%  

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