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 ?
In other words, growth in public debt is presently not at risk of automatically expanding without bound above present levels given current nominal effective interest rates and the strong rates of economic expansion experienced by most states.
(8) Significantly, it is a criminal offense--misdemeanor or felony--to provide loans which have effective interest rates of 25 percent or more, but less than 45 percent.
Deferred gains are amortized using an effective interest rate when amounts and timing can be reasonably estimated.
It is important to note that this problem with the APR is present under any effective interest rate calculation using a common holding-period assumption for all borrowers.
Currency forwards can be used to lock in an effective interest rate. For various reasons, it may be advantageous to borrow foreign money via a foreign subsidiary, and then convert the proceeds to the domestic currency of the parent company.
Most home loans carry a dealkilling effective interest rate of 25 percent.
The effective interest rate on these cards may well be in the 18 percent to 21 percent range.
The interest expense recognized each period would be based on the effective interest rate of 10 percent.
The second section consists chapters and mainly focuses on methods to calculate present and future values, annuities, and effective interest rates. The effective interest rate, which takes into account the effects of points, fees, prepayment penalties, and the frequency of compounding, is the appropriate measure to start with in determining the cost of funds to an investor and is the unknown in many of Chinloy's analytical frameworks.
Also, related to the offering the 3.97% series E guaranteed senior notes have a 10-year term and an effective interest rate of 4.23%, reflecting the settlement of interest rate protection agreements.
The average effective interest rate on a payday loan is around 400% and about 650% for online loans.
The growth in operating income, mainly driven by an increase in net interest income (NII) by $64.1m (up 7.3pc) to $940.5m (2017: $876.5m), was attributable to an increase in average interest earning assets and to the repricing and re-positioning of the loan portfolio, complemented by an effective interest rate risk management strategy.

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