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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
References in periodicals archive ?
The net effective rate of interest on CPEC infrastructure projects is around 2% per annum.
Effective rate of interest: Known by many names, the effective rate of interest (EIR) or average percentage rate is the true economic cost of your loan.
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.
Take the worst-case scenario: assume that the business has an overdraft, and the effective rate of interest that would be earned by leaving the money in the bank is the charge on the overdraft facility.
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.
"This means that if the rack rate on luxury cars is 11.5%, then dealer payout will mean 2-2.5% 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.

Full browser ?