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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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).
Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005

effective interest rate

The actual interest rate of a loan,regardless of the face interest rate or the rate quoted.See annual percentage rate.

The Complete Real Estate Encyclopedia by Denise L. Evans, JD & O. William Evans, JD. Copyright © 2007 by The McGraw-Hill Companies, Inc.
References in periodicals archive ?
The yield is the effective interest rate and moves inversely to a bond's price.
The interest rate on the previous RCF was JIBAR plus 3.3% whereas the effective interest rate on the new RCF ranges between JIBAR plus 2.2% (at the lower end of utilisation) and JIBAR plus 2.6% (at the upper end of utilisation, including full utilisation).
The rate revision will bring down the effective interest rate on micro loans to 17.95 percent from 18.65 percent.
The electrical power generation company said cross-currency swaps have been put in place for 2023, which means the notes will have an effective interest rate of 4.74% per annum.
After giving effect to cancellation costs incurred in connection with the termination of an interest rate swap agreement entered into in anticipation of the issuance of the Notes, the Series A Notes will bear an effective interest rate of 4.52% per annum.
Metrobank reopened to the public its existing two-year bonds at an effective interest rate of 7 percent a year, the bank disclosed to the Philippine Stock Exchange.
As a result of the JV drilling program and other promoted working interests at the ST 320 A-2 well, W&T is expected to contribute 4.8% of the total capital expenditures and will receive 10.8% of the net revenues less expenses until certain thresholds are met, at which time W&T's effective interest in this well will increase to 13.8%.
Mauritius-based property investor Grit Real Estate Income Group (JSE: GTR) has closed the acquisition of an effective interest of 80.1% in Cognis 1 Limitada, incorporated in Mozambique, the company said.
Core earnings decreased in the second quarter primarily due to a $2.5 million increase in effective interest expense and a $1.7 million decrease in effective interest income.
MortgageOne allows clients to pay off their loan much faster than a regular mortgage and at a lower effective interest rate, they further said adding the linked current account allows the clients to meet their transactional needs, at any point in time.
The report stated that Abu Dhabi Islamic Bank- Egypt (ADIB), on the other hand, showed healthy deposit growth, exceeding HC's previous estimate for 2017, with deposits growing 17%, which is about 5% higher than HC's previous estimate on its high effective interest on deposits of 7.51% in 2017.
However, if grant (for Gwadar Airport) and interest free loan (for Gwadar Eastbay Expressway) were excluded, the net effective interest rate would come to 1.7%.

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