# effective interest rate

Also found in: Dictionary, Thesaurus, Medical, Legal, Acronyms, Encyclopedia, Wikipedia.

## 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 ?
As a final note, include any loan processing fees in the computation as these fees tend to push up the effective interest rate.
The entity recalculates the carrying amount by computing the present value of estimated future cash flows at the financial instrument's original effective interest rate calculated in accordance to para 92.
When applying the provisions of the 10% test, "the discount rate to be used to calculate the present value of the cash flows is the effective interest rate, for accounting purposes, of the original debt instrument" (ASC 470-50-40-12).
It demonstrates how the new effective interest rate is computed and shows the debtor's journal entries during the remaining term of the restructured debt.
The degree of compliance of each covered institution is based on four criteria, namely: (i) manner of interest computation, (ii) manner of computation and disclosure of effective interest rate (EIR), (iii) degree of disclosure of required information, including the poster requirement, and (iv) provisions of adequate policies and procedures to ensure consistent compliance.
The rating actions have been prompted by Erste's recent warning that it would post a significant net loss for the third quarter of the year and for the entire 2011 due to sizeable goodwill impairment charges, substantial loan impairment charges (LIC) on its Hungarian exposure, a reclassification of its CDS protection sold portfolio and accounting changes associated with effective interest rate calculations in some of its central and eastern European (CEE) units, Fitch explained.
114 will be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or at the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent.
They may also attach to the pawn ticket a separate sheet containing information on the effective interest rate.
Expected future cash flows may be discounted at the loan's original effective interest rate.
The new financing comes with an effective interest rate of 4% and includes a GBP18m four-year loan, a GBP20m revolver with the same maturity and a working capital facility of GBP6m.

Site: Follow: Share:
Open / Close