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 ?
Underlying earnings actually improved but provisions for mark-to-market losses for copper price hedges and for effective interest rates on certain loans affected the bottom line.
According to the company, the refinancing will provide additional capital for future acquisitions, joint venture investments, other general corporate purposes, share repurchases as well as an increased liquidity and a reduction in its effective interest cost.
which owns an 80% effective interest in four Ruby licences in the Montepuez District of Cabo Delgado province in Mozambique, the company said.
a) an effective interest of 93% in Citadines Michel Hamburg, a serviced residence property located at Ludwig-Erhard-Strake 7.
This loan will be repaid on 7 September 2018 and was issued at an effective interest rate of 3 month Stibor +0.
Microfinance providers (MFPs) effective interest rates are broadly in range of 25 to 40 per cent, however, Microfinance Banks (MFBs) annualized interest rates are within range of 25 to 30 per cent.
In exchange for the shares, Greenland Hong Kong would acquire 41% effective interest in the luxury Project Lane real estate development In New York City.
5 for each Series I debenture of NIS 100 principal amount, reflecting an effective interest of 4.
48 percent of Meralco thereby taking its effective interest in Meralco to 32.
The move by the ECB to pump 60bn euros (PS45bn) a day into government bonds and other assets lowers the effective interest to be earned on euros and pushes investors into other currencies.
The decision by the ECB to pump 60bn euros (PS45bn) a day into government bonds and other assets lowers the effective interest to be earned on euros and pushes investors into other currencies.
It is well known that bond premiums or discounts occur when bonds are purchased for more or less than face value, respectively, and that bond premiums or discounts must be amortized to properly state effective interest expense for issuers and effective interest income for buyers.

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