effective rate of interest

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 of interest

The rate of interest that incorporates compounding in the calculation used to determine the amount of interest to be credited to an account. For amounts invested during an entire year, the annual effective rate of interest multiplied by the principal will equal the amount of earned interest.
References in periodicals archive ?
For instance, an investment of Sh500 can be doubled in 10 years at the effective rate of interest of seven per cent if placed in a fixed deposit.
Besides, additional 3% incentive is given to the farmers for prompt repayment of the loan, thereby reducing the effective rate of interest to 4%.
This helps them to get the effective rate of interest on their loan down substantially which is a huge saving.
There is a subvention of 2 percent and an incentive of 3 percent for prompt payment, thus reducing the effective rate of interest on farm loans to 4 percent.
5% knocked off the interest rates so the effective rate of interest is actually lower than the base rate of 10%," said a senior source with one of the top three auto financing firms.
The bank will evaluate the needs of customers and develop appropriate financing packages including product structuring down payment, tenure of loan, and effective rate of interest on best effort basis.
Calculation of the gain requires present value computations between the original total obligation and the new total obligation, "using the effective rate of interest for the original debt" (paragraph 7).
The operational definition of the tax on money balances is thus -(i - [pi])(m/y), where i is the effective rate of interest paid on cash and reserves.
Under the constant-yield method, interest is accrued by applying an effective rate of interest to the unpaid balance of a loan for a given period.
It indicates the effective rate of interest paid per year.
114, the loss due to impairment is measured as the difference between the carrying value of the loan and the present value of the expected future cash flows discounted at the loan's original effective rate of interest.
Since the interest paid cannot be taken as a deduction for income tax purposes, the effective rate of interest paid is nearly double the prescribed rate; thus, today the rate is in the neighborhood of 27 percent for corporations with income not subject to the Small Business Deduction.

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