Question

A firm offers terms of 1/10, net 30.

What effective annual interest rate does the firm earn if the discount period is increased to 15 days?

Answer 1

Effective annual interest rate = 27.70%

Explanation;

First of all let’s calculate periodic interest rate;

Periodic interest rate (1 / 99) = 1.01%

Following is the formula of effective annual interest rate;

Effective annual interest rate = [(1 + Periodic interest rate) 365 / 15] – 1

Now, let’s put the values in above given formula;

Effective annual interest rate = [(1 + 0.0101) 365 / 15] – 1

Effective annual interest rate = [1.2770] – 1

Effective annual interest rate = 0.2770 Or 27.70%