 # Q:trade credit interest calculation

4Q- 72 Afton Inc. is offered trade credit terms of 2/10, net 45. Afton’s implicit cost of failing to take the discount and instead paying the account in 45 days is closest to: A. 17.10%. B. 21.28%. C. 23.10%. D. 23.45%. __________________________________________ my best guess: B it is like a loan during day11~45,if paid on day 45.I=2%,simple interest annualize: 2%*(365/35)=20.9%

Actually, there is a formula for this: [1+ Discount/(1-Discount)]^(365/# days beyond discount period) - 1 that is [1+0.02/0.98]^(365/(45-10)) - 1= 23.45%

map1, tks! I guess you already passed level 1, right?

it is like a 35-day discount t-bill.

Nope, i failed in December. I’ll take it in June. And I hate working capital formulas:)

Is the appropriate caclulation like a 35 day discount t-bill or the way map has described? I am leaning more towards the t-bill. When I solve for it I get 21.28% as the implicit interest rate. N = 35/365 = .0959 PMT = 0 PV = 100-discount = 98 FV = 100 Solve for I = 21.28% Map…where do you see the logic behind your formula as opposed to the discount t-bill method?

The logic, if there is one, is in the formula listed in the CFAi text (working capital).

Can somebody explain how to read and interpret the credit terms? Thanks S