# effective interest rate

(redirected from Effective annual rate)

## 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 effective annual rate is not derived by simply multiplying the monthly A-O-R by 12 months as interest on such loans is not computed on a diminishing principal balance basis.
EFFECTIVE ANNUAL RATE Generally, an investment's annual rate of return is different from the nominal rate of return when compounding occurs more than once a year ( quarterly, half- yearly).
The formula for converting the nominal return into effective annual rate is:-
5-cent quarterly dividend, an effective annual rate of \$1.
Bank customers complained about the Halifax, claiming it was charging an effective annual rate of interest of 3,650 per cent on an overdraft of just Au10.
Bank customers complained to Panorama about the Halifax, claiming it was charging an effective annual rate of interest of 3,650% on an overdraft of just pounds 10.
the Halifax bank, claiming it was charging an effective annual rate of
However, an effective annual rate comparison relative to the Eurobond issues would be more appropriate as both Eurobonds are annual coupon bonds.
The directive principally concerns what information must be given to the consumer concerning loans, the verification of the consumer's debt carrying capacity by the loaner, the right to withdrawal, the repayment scheme and the indication of the overall effective annual rate (further details in our next edition).
The effective annual rate (EAR) is the rate that, under annual compounding, would have produced the same future value at the end of one year as was produced by more frequent compounding.
People dipping into their overdraft need to watch the effective annual rate as some can be punitive.
The formula for the effective annual rate is determined as follows:

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