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 ?
The following tables reconcile net interest income to effective net interest income and net interest rate margin to effective interest rate margin for the following periods:
By selecting the original effective interest rate, the statement insures that only cash flow deficiencies, not fluctuations in market interest rates, will be included in the impairment measurement.
An issuer of nonconvertible bonds with an investment grade credit rating may seem to incur the same effective interest rate as a lower-rated issuer of convertible bonds if the accounting does not recognize that purchasers of the convertible bonds receive both interest payments and a chance to obtain common stock at a favorable price as a return on their funds.
And if the trend continues, the 20-year 504 rate should fall into the 3% effective interest rate range at the beginning of the New Year.
The Company believes the presentation of effective interest expense, effective costs of funds, effective net interest income and effective interest rate margin measures, when considered together with U.
Using the EILP, the co-op recently closed on a five-year $359,000 EILP loan at an effective interest rate of 2.
When a loan is impaired, the valuation allowance to be established is the difference between the recorded investment of the impaired loan and the present value of the 1oan's expected future cash flows, discounted at the 1oan's effective interest rate (the 1oan's contractual interest rate adjusted for any deferred loan fees or costs, premiums or discounts).
Higher earning assets had a positive effect on interest income and lower financing costs increased our effective interest rate margin* to 1.
The effective interest rate is the contractual interest rate adjusted for any deferred loan fees or costs, premiums or discounts existing at the loan's inception.
The Company paid contingent interest on the Notes with respect to the preceding six month period of May 16, 2011 to November 15, 2011, during which period the Notes bore a total effective interest rate of 2.
Core earnings, effective interest expense (and by calculation, effective cost of funds) and effective net interest income (and by calculation, effective interest rate margin) are non-Generally Accepted Accounting Principles ("GAAP") financial measures.
The official 20-year 504 loan effective interest rate - the rate small business borrowers pay including servicing fees - should be published by Oct.

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