effective interest rate

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Effective Interest Rate

The annual rate at which an investment grows in value when interest is credited more often than once a year.

Effective Interest Rate

The interest rate on a debt or debt security that takes into account the effects of compounding. For example, if one has a fixed-income investment such as certificate of deposit that pays 3% in interest each month, the effective interest rate is more than 3% because compounding the interest results in a (slightly) greater principal each month on which the interest rate is calculated. In this example, the effective interest rate is calculated thus:

Effective interest rate = (1 + .03/12)^12 - 1 = .0304 = 3.04%, where .03 is the simple interest rate and 12 is the number of times in a year interest is compounded. It is also known as the annual effective rate or the annual equivalent rate. See also: Stated annual interest rate, annual percentage yield.

effective interest rate

the INTEREST RATE payable on the purchase price of a BOND. For example, a bond with a face value of £100 and a NOMINAL (COUPON) INTEREST RATE of 5% generates a nominal return of £5 per year. If, however, the bond can be purchased for £50 on the open market, then the effective interest rate now rises to 10%, representing a 10% return on the £50 invested. The lower the purchase price of a bond with a given nominal rate of interest, the higher its effective rate of interest will be, and vice-versa. There is thus an inverse relationship between the price paid for a bond and its effective rate of interest (sometimes called the interest YIELD).

effective interest rate

The actual interest rate of a loan,regardless of the face interest rate or the rate quoted.See annual percentage rate.

References in periodicals archive ?
The loan capital shall be repaid in full after 7 years and shall bear variable interest plus the costs that Koor shall be responsible for, resulting in an estimated annual effective rate, based upon today's LIBOR rate, of about 6%.
All advertisements for savings accounts must display the interest rate as an annual effective rate, as well as the flat rate of interest.
Due to the uncertainty of current market conditions, the Company is unable to provide precise annual effective rate guidance at this time.
The Trust has also obtained commitments aggregating approximately $139 million for a five-year loan secured by four retail assets located in Northern Virginia that is expected to bear interest at an annual effective rate of 7.
The Company anticipates its annual effective rate to be approximately 39.
During the third quarter of 2008, ARCA revised its 2008 annual effective rate upward to reflect the company's expectation, based on its current quarterly results, that its U.
Income tax expense was recorded for the first quarter at an annual effective rate of 39.
In the fixed account, interest is compounded on a daily basis and is credited monthly at an annual effective rate declared by the company and guaranteed to be no less than 2 percent.
Income tax expense was recorded for the fourth quarter at an annual effective rate of 38.
6% in the fiscal 1995 fourth quarter reflects adjustment of the federal and state tax provisions to the expected actual annual effective rate of 39.
Income tax expense of $3,060,000 at an annual effective rate of 38.
The effective interest rate has not been so low since 1968, when the annual effective rate was 7.

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