Business Glossary

landmark federal legislation establishing rules of disclosure that lenders must observe in dealings with borrowers. The act stipulates that consumers be told annual percentage rates, potential total cost, and any special loan terms. The act, enforced by the Federal Reserve Bank, is also known as the Truth in Lending Act.

landmark federal legislation establishing rules of disclosure that lenders must observe in dealings with borrowers. The act stipulates that consumers be told annual percentage rates, potential total cost, and any special loan terms. The act, enforced by the Federal Reserve Bank, is also known as the Truth in Lending Act.

computations based only on the original principal. compound interest is applied to the original principal and accumulated interest. For example, $100 deposited in a savings account at 10% simple interest would yield the interest of $10 per year (10% of $100).

finance charges computed by adding the interest payable to the full amount of loan principal. The add-on interest is added to the original principal amount, and becomes a part of the face amount of the promissory note.

Computing interest due under the add-on interest method is fairly simple. The loan principal is divided into a number of fixed payments, and each payment is multiplied by the finance charge, to calculate the interest cost to the borrower: Add-On Interest = Principal × Rate × Number of Months in the loan/12.

stated interest rate on the face of a debt security or loan. For example, if a bond having a face value of $100,000 has a coupon interest rate of 8%, the nominal interest is $8000, which will be paid each year. The terms nominal interest rateand coupon rateare synonymous in discussing bonds; the latter term is still commonly used even though it is rare these days for bonds to be issued with physical coupons.

yield on a debt instrument as calculated from the purchase price. The effective rate on a bond is determined by the price, the coupon rate, the time between interest payments, and the time until maturity. Every bond's effective rate thus depends on when it was bought. The effective rate is a more meaningful yield figure than the coupon rate.