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 ?
'On the concessional interest rate, according to the DOF, if we account for all salient factors and not just the nominal rate (e.g., project cost, denomination of loan, and foreign exchange depreciation risk, among others), the effective interest rates between the recently signed Japanese and Chinese loan agreements are actually quite close to each other.
"However, we expect large primary surpluses, robust growth and contained nominal effective interest rates will reduce GGGD/GDP to 70 per cent of GDP by 2027."
Penalties and effective interest rates in these months show increasing usury, much worst than loan sharks.
The effective interest rates for many are even higher than those published by many of the lenders.
The firm said that it has launched a new loan for students with effective interest rates starting from as low as 6.14 percent per annum.
They said that prior to the entry of PLIs, DepEd borrowers had limited choices and were therefore, forced to avail of loans from other sources that impose effective interest rates as high as 50 percent.
Coupled with gradually increasing effective interest rates and continued primary surpluses, this would see debt-to-GDP fall to around 80% in 2022.
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.
Over the same period, there have been matching declines in effective interest rates faced by the household and corporate sectors.
- Key comparison features include lowest effective interest rates, lowest monthly instalments, hidden charges and additional fees
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.

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