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Use the same invoice-date gap
For fictional terms 2/10 net 30, the additional gap is twenty days. The period cost is 2/98, approximately 2.0408%. Use the same gap and annual day-count base in both reported rates.
Calculate the two conventions
| Convention | Reported rate |
|---|---|
| Simple annualized | 37.2449% |
| Effective annualized | 44.5853% |
Match the alternative’s convention
A bank’s annual quotation can include its own compounding, day-count, fees and draw conditions. An unmatched annual percentage comparison can conceal differences in actual cash costs.
Use the real horizon for a one-invoice exercise
The actual-horizon model compares the discount amount with modeled funding costs over the relevant gap. Repeated-period annualization is not itself the cash charge on the single invoice.