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Trade Credit Rates and Annual Rates of Interest

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Company X sells on a 1/20, net 60, basis. Customer Y buys goods with an invoice of $1,000.

a. How much can company Y deduct from the bill if it pays on day 20?

b. How many extra days of credit can company Y receive if it passes up the cash discount?

c. What is the effective annual rate of interest if Y pays on the due date rather than day 20?

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Solution Summary

This solution looks at the finances of company X and customer Y.

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a) The discount on paying on Day 20 is 1%, so company Y can deduct $10 from the bill and should pay $990.

b) ...

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