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Dear Sir,
The Example 1 of the lecture notes where u discuss the simple settlement I’m confused about the concept of effective interest rate I have watched you MA videos on it and I understand how to convert yearly into monthly interest and vice versa but my doubt is that why did you take 4/96 instead of 4/100 to get the effective intrest rate of 2 months the rest of the solution I can understand but I’m only getting confused behind the logic in the 4/98 part
Warmest Regards
Have you watched the Paper FM lectures working through this example, because I do explain this in the lectures?
If they offer a 4% discount, then for every $100 invoiced they will only receive $96.
Therefore they receive instead of receiving $100 in a months time, they receive $96 now.
So for every $96 received now, they are losing $4 that they could otherwise have received, which is similar to paying interest of $4 on every $96 received early.
Dear sir
Yes I understand now and after going through the payables part of the lectures it’s more clearer thank you for clearing my doubt
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