Effective rate


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Effective rate

A measure of the time value of money that fully reflects the effects of compounding.

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 Rate

The interest rate adjusted for intra-year compounding.

Because interest on a mortgage is calculated monthly, a 6% mortgage actually has a rate of .5% per month. If there were no principal repayments the first year, $100 invested in a 6% mortgage would actually earn $6.17 of interest during the year because of reinvestment of monthly interest. The “effective rate” is thus 6.17%, while 6% is termed the “nominal” rate. Similarly, a 6% bond on which interest is paid quarterly has an effective rate of 6.14%.

References in periodicals archive ?
Always Had Effective Rate Review Program: States that CMS determined to have effective rate review programs for all major types of carriers (ie, for-profit insurers, non-profits, and health maintenance organizations [HMOs]) for each of its reviews, and based on our analysis, had already met CMS's effectiveness criteria when the ACA was enacted.
Unfortunately, most MRSK branches have underperformed the regulatory benchmarks for controllable operating costs, and in some cases, by extremely wide margins, which led to lower effective rates of return on RAB.
Although statutory rates ranged from a high of 20% to a low of 3%, for most states the range related to the effective rate the credit was narrow and much lower.
But the Finance Ministry argues the effective rate of Japan's corporate tax has already been cut to internationally acceptable levels.
The reduction in the overall marginal rates and the lowering of the effective rates for married taxpayers create a general rule for the use of the NOLs--an NOL should be used against income taxed at the highest marginal rate.
And finally, as an alternative to the present tax code with its high marginal tax rates (``counterproductive at best, perverse at worst''), he endorses a flat tax, arguing that while its marginal rate is flat, its effective rate is progressive when a personal exemption is taken into consideration.
That means capital gains will be taxed at an effective rate of 28.
Section 954(b)(4) of the Internal Revenue Code provides that income otherwise taxable under Subpart F may be excluded if the taxpayer establishes that such income was "subject to an effective rate of income tax imposed by a foreign country greater than 90 percent" of the U.
Over the life of the new license, the estimated effective rate of the fixed payments and royalties is expected to be approximately half of the effective rate in recent years under the current license.
A managed compliance agreement or effective rate agreement is a written agreement, generally entered into following the completion of an audit.
8 m), corresponding to an effective rate of taxation of 22.
An excess credit position means a higher effective tax rate due to inefficient use of foreign taxes paid; an excess limitation position means a higher effective rate due to inefficient use of foreign-source income.

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