Hi sir I am ok with calculations but I am confused with concept. Overdraft is the rate that bank charge us and in question we calculate effective interest rate over the remaining period. This effective rate we should charge customer for remaining 2 months. Bank charge us20% and we charge customer 27.76% So with this concept discount is allowed?

You will compare it to the overdraft interest rate to decide which is cheaper – offering a discount so as to get money sooner and therefore pay less overdraft interest, or not.

Hello Sir, The calculation used in simple settlement discount is (i/1-i) instead of (i/n). Is it because the calculation is of effective cost and not effective interest that there is this difference in formula ?

I do not understand what you are asking. You should not simply learn formulae – the exam tests that you understand what you are doing and my answer to the question is correct,

Thanks for your prompt reply sir. Forgive my long winded question, but I was trying to understand the calculation of effective cost about why do we divide the concerned interest (eg, 4% discount allowed) by 96% instead of the number of periods.

If have an invoice for $100 and you pay now then you only pay $96. By delaying payment you pay an extra $4. And so it is like paying interest of $4 on every $96 delayed.

ahmedkhan says

Hi sir

I am ok with calculations but I am confused with concept.

Overdraft is the rate that bank charge us and in question we calculate effective interest rate over the remaining period.

This effective rate we should charge customer for remaining 2 months.

Bank charge us20% and we charge customer 27.76%

So with this concept discount is allowed?

loukasierides says

also Sir, isn’t the actual amount of the overdraft a factor that will determine whether we should offer the discount

John Moffat says

No – it is not relevant.

loukasierides says

ok thank you

loukasierides says

Dear Sir, i understand the effective interest calculation, but how is this related to the overdraft interest?

John Moffat says

You will compare it to the overdraft interest rate to decide which is cheaper – offering a discount so as to get money sooner and therefore pay less overdraft interest, or not.

ranilxmie says

Thank you sir, I get it now 馃檪

John Moffat says

You are welcome 馃檪

ranilxmie says

Hello Sir,

The calculation used in simple settlement discount is (i/1-i) instead of (i/n). Is it because the calculation is of effective cost and not effective interest that there is this difference in formula ?

John Moffat says

I do not understand what you are asking. You should not simply learn formulae – the exam tests that you understand what you are doing and my answer to the question is correct,

ranilxmie says

Thanks for your prompt reply sir. Forgive my long winded question, but I was trying to understand the calculation of effective cost about why do we divide the concerned interest (eg, 4% discount allowed) by 96% instead of the number of periods.

John Moffat says

I do explain this in the lecture 馃檪

If have an invoice for $100 and you pay now then you only pay $96. By delaying payment you pay an extra $4. And so it is like paying interest of $4 on every $96 delayed.

murevegwac says

Good morning.

Are these the new lectures for the June 17 exam?

John Moffat says

Yes, they apply for all the 2017 exams.