No Payments! No Interest! No Money Down!!!

The ad screams out from the Sunday paper: BUY NOW AND PAY NOTHING UNTIL THE YEAR AFTER NEXT!

NO INTEREST! Such promotional campaigns have appeared with increasing frequency in recent years, often offered by such major companies as Best Buy and Rhodes Furniture.

They may offer 6 months or more of interest-free loans. For purchases made in November or December, they may offer 14 months with no payments or interest, thus permitting purchasers to defer any cash outlays until early in the year after next. However, if full payment is not made by the specified date, interest is typically due from the original date of purchase, often at 18 to 24 percent.

a. Why would a company be willing to allow customers to delay payment for 6 to 14 months and not charge interest?

b. If a company permits customers who purchase merchandise in December 2000 to defer payment until January 2002, how does the company pay its bills in the meantime? Do you think the retail company extends credit itself, or might it enter into some type of arrangement with a financial institution? What type of credit arrangement do you think might be used?

c. Best Buy Co. has a fiscal year ending at the end of February. Why would Best Buy be unlikely to make this type of offer near its year-end?

d. Assume you are a customer about to purchase $2,500 of furniture and can choose between purchasing it at either of two stores having special sales:
Zippy Furniture Sales: 14 months with no payments or interest; if the full amount is not paid by the end of that time, interest must be paid from the date of purchase at a 24 percent annual rate.
Zappy Home Interiors: All merchandise on sale for 20 percent off; cash must be paid at the time of purchase.
Although you currently have the cash to make the purchase, you were hoping to invest that cash in the stockmarket and earn a 12 percent annual return. Which alternative would you choose? Explain.
Suppose you were choosing between the two alternatives, but you would not have the needed cash for 18 months.
However, because of your excellent credit record you can get a bank loan whenever you need it at a 10 percent annual rate. What actions would you take? Why?
o PART II