Share
Explore BrainMass

Effective rate of interest

1. Regis Clothiers can borrow from its bank at 11 percent to take a cash discount. The terms of the cash discount are 2/15, net 60. Should the firm borrow the funds?

2. A pawn shop will lend you $2000 for 45 days at a cost of $5 interest. What is your effective rate of interest?

3. Randall Corporation plans to borrow $200,000 for one year at 12 percent from the Waco State Bank. There is a 20 percent compensating balance requirement. Randall Corporation keeps minimum transaction balances of $10,000 in the normal course of business. This idle cash counts toward meeting the compensating balance requirement. What is the effective rate of interest?

Solution Preview

1. Regis Clothiers can borrow from its bank at 11 percent to take a cash discount. The terms of the cash discount are 2/15, net 60. Should the firm borrow the funds?

In order to decide that we need to compare the cost of borrowing from the bank and the cost of not taking the discount.
The annualized cost of not taking the discount is given as (% discount)/(100-% discount) X 365/(payment days - discount period)
The terms are 2/15, net 60. There ...

Solution Summary

The solution explains how to determine the effective rate of interest

$2.19