A method for accounting for bond premiums or discounts.
The effective interest rate is a key financial metric calculated from the purchase price of a debt instrument. It provides a more precise measure of the actual yield on a bond compared to the face interest rate or coupon rate.
A Face Interest Rate is the percentage interest rate specified on the bond or loan document. It differs from the Effective Rate, which is a more meaningful yield figure reflecting the actual cost of borrowing.
The effective interest rate on a loan resulting from dividing the interest by the actual proceeds received. For instance, on a $1,000 discounted loan with a 10% interest rate, the net interest would be $100/$900 = 11.1%.
