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 ?
No loss is allowed on the exchange of pools of debt obligations having substantially the same effective interest rates and maturities.
4 percent discount to par and have effective interest rates of 9.
Commissioner, ruled savings and loans realize deductible tax losses in connection with exchanges of mortgage pools that feature substantially the same effective interest rates and maturity dates.
Both the 20- and 10-year SBA effective interest rates are fixed for the term of the 504 loan and require as little as a 10% down payment.
The amendment reduced the effective interest rates by approximately 75 basis points, extended the maturity date to July 26, 2016 and modified covenants to increase DXP's ability to complete future acquisitions.
Lower average outstanding borrowings of approximately $16,800,000 and lower annualized effective interest rates of 250 basis points contributed to lower interest expense for the quarter.
He led our February 2005 refinancing, which provided us with a $70 million asset based revolving credit facility, reduced our effective interest rates on outstanding borrowings, and extended the average maturity dates on our secured debt.
Interest and other fixed obligations will be meaningfully reduced in 2004 as a result of debt reduction in 2003 and projected further reductions in 2004 (including recent asset sales), lower effective interest rates related to the company's numerous refinancing activities and the elimination of the Series A preferred dividend obligation.
The effective interest rates to PCA for the five-year and ten-year notes are 3.
Maintenance of large reserves and additional interest subsidy funds result in extremely low effective interest rates to Connecticut communities financing water and wastewater system improvements.
A spokesman for HRPT pointed out that the effective interest rates payable for these loans is approximately 7.

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