Dictionary of Banking Terms: effective rate
effective rate
- rate of interest paid on a loan, or earned on an interest-bearing deposit, as distinguished from the nominal interest rate. In a bank loan, it is the Annual Percentage Rate (APR).See also add-on interest; Annual Percentage Rate (APR); simple interest.
- investor's yield realized on a bond or security, which is different from the coupon rate The effective rate takes into account the price paid, the time to maturity, and the amortization of premium or accretion of a discount. Also called effective yield.
- weighted average cost of Federal Funds purchased in the inter-bank market, calculated by the Federal Reserve Bank of New York. Banks that are short in the reserve account are charged at a rate equal to the effective rate of the Federal Funds.
Dictionary of Finance and Investment Terms: effective rate
effective rate
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.
