A firm sells its accounts receivables to a factor at a 3.5% discount. The average collection period is 3 month.   a. What is the effective annual interest rate on this arrangement? (Round your answer to 2 decimal places.)           b. What is the implicit effective annual interest rate if the average collection period is 5 months? (Round your answer to 2 decimal places.)

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Cost of Credit

The cost of credit is an extra amount that the borrower has to pay besides the loan amount. These credit charges may vary from loan to loan. The cost of credit includes interest charges, maintenance charges, and arrangement charges. Some of the costs are mandatorily collected by the lender based on the loan amount and tenure of the loan. The cost of credit is also called finance charges of the credit.