Question

A Chinese exporter sells $200,000 of toys to a French importer. The Chinese exporter requires the French importer to obtain a letter of credit. When the bank accepts the draft, the exporter discounts the 90-day note at a 4 percent discount. What does the exporter's true effective annual financing cost?

Answer 1

0.0416483 or 4.16%

Explanation:

Annual percentage rate, APR = 4%

Value of toys sold = $200,000

Note period = 90 day

N = 365 ÷ 90

= $200,000 × [1 - (0.04 × 90/360)]

= $198,000

Effective annual financing cost:

`=((Value\ of\ toys\ sold)/(Calculated\ value) )^{(365)/(90) }-1`

`=((200,000)/(198,000) )^{(365)/(90) }-1`

= 1.0416483 - 1

= 0.0416483 or 4.16%