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Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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## Credit Terms: Effective Annual Rate Calculation The objective is to find the effective annual rate (EAR) of the following credit terms. Each scenario provides a discount if payments are made within a specified number of days; otherwise, the net payment is due later. 1. **2.2% discount** if paid within 10 days or net within 30 days. 2. **1.2% discount** if paid within 32 days or net within 60 days. 3. **0.5% discount** if paid within 20 days or net within 45 days. 4. **0.7% discount** if paid within 17 days or net within 30 days. ### Questions a. **What is the effective annual rate of a 2.2% discount if paid within 10 days or net within 30 days?** - **Answer:** ______ % - *(Round to two decimal places.)* b. **What is the effective annual rate of a 1.2% discount if paid within 32 days or net within 60 days?** - **Answer:** ______ % - *(Round to two decimal places.)* c. **What is the effective annual rate of a 0.5% discount if paid within 20 days or net within 45 days?** - **Answer:** ______ % - *(Round to two decimal places.)* d. **What is the effective annual rate of a 0.7% discount if paid within 17 days or net within 30 days?** - **Answer:** ______ % - *(Round to two decimal places.)* The concept of EAR is important in finance as it allows comparison between different financial products and credit terms by considering the effects of compounding over a year. Calculating the EAR for the scenarios above provides insights into the actual cost or benefit of taking the discount compared with paying the invoice at the gross amount by the net terms.
Transcribed Image Text:## Credit Terms: Effective Annual Rate Calculation The objective is to find the effective annual rate (EAR) of the following credit terms. Each scenario provides a discount if payments are made within a specified number of days; otherwise, the net payment is due later. 1. **2.2% discount** if paid within 10 days or net within 30 days. 2. **1.2% discount** if paid within 32 days or net within 60 days. 3. **0.5% discount** if paid within 20 days or net within 45 days. 4. **0.7% discount** if paid within 17 days or net within 30 days. ### Questions a. **What is the effective annual rate of a 2.2% discount if paid within 10 days or net within 30 days?** - **Answer:** ______ % - *(Round to two decimal places.)* b. **What is the effective annual rate of a 1.2% discount if paid within 32 days or net within 60 days?** - **Answer:** ______ % - *(Round to two decimal places.)* c. **What is the effective annual rate of a 0.5% discount if paid within 20 days or net within 45 days?** - **Answer:** ______ % - *(Round to two decimal places.)* d. **What is the effective annual rate of a 0.7% discount if paid within 17 days or net within 30 days?** - **Answer:** ______ % - *(Round to two decimal places.)* The concept of EAR is important in finance as it allows comparison between different financial products and credit terms by considering the effects of compounding over a year. Calculating the EAR for the scenarios above provides insights into the actual cost or benefit of taking the discount compared with paying the invoice at the gross amount by the net terms.
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