Simple and effective annualization of discount costs

g is a positive date gap and n is the stated annual day-count base.

Read the formula and its variables

r_{simple}=\frac{d}{1-d}\frac{n}{g},\quad r_{effective}=\left(1+\frac{d}{1-d}\right)^{n/g}-1

g is a positive date gap and n is the stated annual day-count base.

For 2/10 net 30 and 365 days, the simple and effective reported rates differ.

The illustrative inputs are not an actual issuer’s data. Match balance coverage, flow period and units before applying the formula.

Effective annualization assumes repetition of the period factor. A single invoice decision needs its actual-horizon cash costs.

A ratio change can motivate a further question. It does not automatically identify the transaction, risk or operational outcome that produced it.