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 ?
We expect the dividend payout to be broadly neutral for FCF as it is mitigated by a reduction of about RUB2 billion in effective interest rates as a result of the recent debt refinancing, on top of other operational optimisation cost savings of over RUB1 billion delivered in 1H17.
The below chart illustrates the rather sharp recent correction of the effective interest rates for short-dated government T-Bills.
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.
Fortunately, spreadsheet calculators already incorporate the formula for computing effective interest rates.
For the first time since the early 1980s, the US economic outlook may face simultaneous increases in debt levels and effective interest rates.
According to the SBP statement the banks have been directed to supply specimen of the Summary Box containing the minimum information relating to Annualized Percentage Rate (APR), effective interest rates, alongwith minimum monthly repayments, card limits, fees & charges, insurance coverage, etc.
Attractive discounts are available under this offer resulting in effective interest rates starting from 12.
Another way to compare loans with varying terms is to calculate effective interest rates (EIR).
One factor is present if the debtor is servicing the existing debt and has access to financing from other lenders to pay off the debt at effective interest rates equivalent to those for nontroubled debtors.
75x the company's 12-month trailing EBITDA and the effective interest rates were lowered for drawn and undrawn pricing based on ABM's leverage ratio.
Compounding of interest on judgments is only a question of effective interest rates.
It would also make the benefits of the equivalent effective interest rates available to all taxpayers, not just those capable of preparing the complicated calculations.

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