effective interest rate

(redirected from Effective Interest Method)

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.

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the effective interest method, being the rate that exactly discounts
subsequently at amortised cost using the effective interest method, less
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component is recognised at amortised cost, using the effective interest method.
carried at amortised cost using the effective interest method, previously under
Freeload Press 2005), for a detailed discussion of the effective interest method.
Exhibit 1 illustrates the amortization table, using the effective interest method, for City Bank.
Therefore, the effective interest method of amortization provides a way to almost eliminate the impact of the gain on margins, all other things being equal.
Beginning September 1, 2006, it was determined that since the Tap Participation Fees are a financing instrument and not contingent consideration, the Company must impute interest on the unpaid balance using the effective interest method.
3 million) on initial recognition, was accreted to interest expense over the expected terms of the Notes using the effective interest method.
recognised at amortised cost, using the effective interest method.

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