Bonds, returns and business math Updated November 2026

Cost of trade credit

Terms like 2/10 net 30 give a 2% discount if paid within 10 days, otherwise full price in 30. Skipping the discount borrows 98% of the invoice for 20 extra days at 2%: annual cost = d / (1 - d) x 365 / (net days - discount days) = 37.2%.

Syntax

annual cost = d / (1 - d) x 365 / (net days - discount days)   effective: (1 + d / (1 - d))^(365 / extra days) - 1

Part	What it is
`d`	Discount percentage as a decimal (2% = 0.02)
`discount days`	Days within which the discount applies
`net days`	Days until the full amount is due

Examples

2/10 net 30
0.02 / 0.98 x 365 / 20

Result: Annual cost = 37.24% (effective annual rate 44.59%)

1/10 net 30
0.01 / 0.99 x 365 / 20

Result: Annual cost = 18.43%

2/10 net 60
0.02 / 0.98 x 365 / 50

Result: Annual cost = 14.90%

Common mistakes

Using 30 days instead of 20 in the formula: the credit period that costs anything is only the days between the discount date and the net date.
Dividing by 1 instead of (1 - d): on a 100 invoice you pay 98 early or 100 late, so the interest is 2 on 98, not on 100.
Concluding the discount is small because it is 2%: annualized it is one of the most expensive forms of credit a business can use.

Practice Cost of trade credit

These drills check your answer on live data, free, no account needed.

Cost of skipping a discountA supplier offers terms of 3/10, net 30. If you skip the discount and pay on day 30, what is the nominal annual cost of that credit? Use a 365-day year.
Effective rate with daily compoundingA short-term business line of credit charges 8.25% APR, compounded daily on a 365-day year. What is the effective annual rate?

Questions

Should I take a 2/10 net 30 discount if I have to borrow to do it?

Almost always yes. Skipping it costs about 37% a year; a bank line at 8% to 12% is far cheaper, so borrow and pay early.

What if I pay late, after the net date?

Stretching payables lowers the annualized cost (2/10 paid on day 60 costs 14.9%) but risks supplier relationships, late fees and credit terms being withdrawn.

Effective annual rateThe effective annual rate turns a nominal rate with monthly, quarterly or daily compounding into the true yearly rate: (1 + i/m)^m - 1. Examples and Excel.
Simple interestSimple interest is principal times rate times time (I = P x r x t). Worked examples for years, months and days, the Excel formula and the mistakes to avoid.
APR vs APYAPR is the yearly rate without compounding; APY includes it. Convert with APY = (1 + APR/n)^n - 1, worked examples and the Excel EFFECT and NOMINAL functions.
Margin vs markupMargin is profit divided by price; markup is profit divided by cost. How to convert between them, set a price from a target margin, examples and the error.