# effective interest rate

(redirected from Annual Effective 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 ?
She is confident that she can earn an annual effective rate of 8% per year in her portfolio.
All advertisements for savings accounts must display the interest rate as an annual effective rate, as well as the flat rate of interest.
Due to the uncertainty of current market conditions, the Company is unable to provide precise annual effective rate guidance at this time.
Outstanding balance of previous EML will be deducted from the Gross loan with an interest rate is 6% per annum, computed in advance with an annual effective rate of 9.
The Company anticipates its annual effective rate to be approximately 39.
Income tax expense was recorded for the first quarter at an annual effective rate of 39.
Income tax expense was recorded for the fourth quarter at an annual effective rate of 38.
Income tax expense of \$3,060,000 at an annual effective rate of 38.
Fiscal 2006 results include expenses for stock options in the amount of \$844,000 and income tax expense of \$4,380,000 at an annual effective rate of 38.
Fiscal 2006 first quarter results include expenses for stock options in the amount of \$190,000 and income tax expense of \$563,000 at an annual effective rate of 35%.
The fourth quarter includes income tax expense of \$751,000 and additional income tax expense for the first three quarters of \$1,717,000, both recorded at the annual effective rate of 33.

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