CFA Practice Question

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CFA Practice Question

Your company purchased $10,000 worth of inventory on January 2nd on credit. The terms of the sale are 3/15 net 45. What is the effective annual interest rate if you pay the full amount in 35 days?
A. 28%
B. 37.6%
C. 74.3%
Explanation: (1 + 0.03/0.97)(365/20)-1 = 0.7435

User Contributed Comments 9

User Comment
s16liu where does the 20 days come from?
malawyer you paid 20 days after you could have paid with the discount (35 - 15 = 20)
staudinger where does the 0.97 come from? 1 - 0.03?
Allen88 I guess, one way to look at it is like this: the real cost is actually $97,000. The $3,000 is interest that the supplier earns if you don't pay back in 15 days. So they are making $3,000 on $97,000. I think this explains the .03/.97 in the equation.
Profache Effective Interest Rate =
(1+(Discount/1-Discount)^(365/days after discount period)
najat Good question, got it wrong, I used 35 days instead of 20...
thecfaguy Any one knows how the discount is being calculated here ? Just confused as to how they have arrived at 0.03 (3%).
soukhov its from the terms of the sale
dan1987 3 = Discount
15 = Discount period
45 = Period in which whole payment must be received
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