# 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 ?
AERL Holding also intends to take the necessary steps to acquire compulsorily any outstanding Aer Lingus shares and to re-register Aer Lingus as a private company.
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This announcement of new services by Aer Lingus is fantastic news.
The commission is considering whether Ryanair, which has held a stake in Aer Lingus for six-and-a-half years, should cut its holding to below 25% to reduce its influence on the Irish rival and is seeking views on appropriate levels.
82% of Aer Lingus, announced its bid to buy out its rival at the end of June.
Ryanair has asked six other airlines to fly alternative routes connected to Dublin, a market that it dominates along with Aer Lingus, to assure regulators that the market will remain competitive, the Financial Times (http://www.
The message was sent to all members of AER, and it announced that JVIB would become the official journal of AER starting January 2013.
Positioned as a delightful and quirky brand, aer aims to bring alive consumer experiences to enhance their personal space, either at home or in the car.

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