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To obtain $41,670 of costly trade credit, SKI must give up 0.01($512,106) = $5,121
in lost discounts annually.
Since the forgone discounts pay for $41,670 of credit, the
nominal annual interest rate is 12.29 percent:
670
,
41
$
121
,
5
$
= 0.1229 = 12.29%.
Here is a formula that can be used to find the nominal annual interest rate of costly
trade credit:
credit
trade
of
cost
Nominal
=
.
period
discount
taken
ays
D
Days
5
36
%
iscount
D

1
%
iscount
D
−
×
In this situation,
%.
9
12.2
=
29
0.12
=
1667
.
12
0.0101
=
10

40
5
36
99
1
×
×
Note (1) that the formula gives the same nominal annual interest rate as was
calculated earlier, (2) that the first term is the periodic cost of the credit (SKI spends
$1 to get the use of $99), and (3) that the second term is the number of “savings
periods” per year (SKI delays payment for 40  10 = 30 days), and there are 365/30 =
12.1667 30day periods in a year.
Therefore, we could calculate the exact effective
annual interest rate as: effective rate = (1.0101)
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.
 Spring '08
 Staff
 Interest, Interest Rate

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