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Effective Interest Rate |
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Definition of Effective Interest RateEffective Interest RateThe rate of interest actually earned on an investment. It is
Related Terms:Effective annual interest rateAn annual measure of the time value of money that fully reflects the effects of effective annual interest rateinterest rate that is annualized using compound interest. discount ratethe rate of return on investment that would be required by a prudent investor to invest in an asset with a specific level risk. Also, a rate of return used to convert a monetary sum, payable or receivable in the future, into present value. fractional interest discountthe combined discounts for lack of control and marketability. g the constant growth rate in cash flows or net income used in the ADF, Gordon model, or present value factor. Accelerated cost recovery system (ACRS)Schedule of depreciation rates allowed for tax purposes. Accelerated depreciationAny depreciation method that produces larger deductions for depreciation in the Accrued interestThe accumulated coupon interest earned but not yet paid to the seller of a bond by the Active portfolio strategyA strategy that uses available information and forecasting techniques to seek a Adjustable rate preferred stock (ARPS)Publicly traded issues that may be collateralized by mortgages and MBSs. After-tax real rate of returnMoney after-tax rate of return minus the inflation rate. All equity rateThe discount rate that reflects only the business risks of a project and abstracts from the Amortizing interest rate swapSwap in which the principal or national amount rises (falls) as interest rates Annual percentage rate (APR)The periodic rate times the number of periods in a year. For example, a 5% Arithmetic average (mean) rate of returnArithmetic mean return. Auction rate preferred stock (ARPS)Floating rate preferred stock, the dividend on which is adjusted every Average rate of return (ARR)The ratio of the average cash inflow to the amount invested. Average tax rateTaxes as a fraction of income; total taxes divided by total taxable income. Barbell strategyA strategy in which the maturities of the securities included in the portfolio are concentrated Base interest rateRelated: Benchmark interest rate. Basic business strategiesKey strategies a firm intends to pursue in carrying out its business plan. Benchmark interest rateAlso called the base interest rate, it is the minimum interest rate investors will Best-interests-of-creditors testThe requirement that a claim holder voting against a plan of reorganization Break-even payment rateThe prepayment rate of a MBS coupon that will produce the same CFY as that of Break-even tax rateThe tax rate at which a party to a prospective transaction is indifferent between entering Broker loan rateRelated: Call money rate. Bullet strategyA strategy in which a portfolio is constructed so that the maturities of its securities are highly Buy-and-hold strategyA passive investment strategy with no active buying and selling of stocks from the Call money rateAlso called the broker loan rate , the interest rate that banks charge brokers to finance Capitalized interestinterest that is not immediately expensed, but rather is considered as an asset and is then Cash flow after interest and taxesNet income plus depreciation. Combination strategyA strategy in which a put and with the same strike price and expiration are either both Compound interestinterest paid on previously earned interest as well as on the principal. ConglomerateA firm engaged in two or more unrelated businesses. Conglomerate mergerA merger involving two or more firms that are in unrelated businesses. Corporate acquisitionThe acquisition of one firm by anther firm. Corporate bondsDebt obligations issued by corporations. Corporate charterA legal document creating a corporation. Corporate financeOne of the three areas of the discipline of finance. It deals with the operation of the firm Corporate financial managementThe application of financial principals within a corporation to create and Corporate financial planningFinancial planning conducted by a firm that encompasses preparation of both Corporate processing floatThe time that elapses between receipt of payment from a customer and the Corporate tax viewThe argument that double (corporate and individual) taxation of equity returns makes Corporate taxable equivalentrate of return required on a par bond to produce the same after-tax yield to Coupon rateIn bonds, notes or other fixed income securities, the stated percentage rate of interest, usually Covered call writing strategyA strategy that involves writing a call option on securities that the investor Covered interest arbitrageA portfolio manager invests dollars in an instrument denominated in a foreign Covered or hedge option strategiesStrategies that involve a position in an option as well as a position in the Crediting rateThe interest rate offered on an investment type insurance policy. Cross ratesThe exchange rate between two currencies expressed as the ratio of two foreign exchange rates Crossover rateThe return at which two alternative projects have the same net present value. Current rate methodUnder this currency translation method, all foreign currency balance-sheet and income Dedication strategyRefers to multi-period cash flow matching. Discount rateThe interest rate that the Federal Reserve charges a bank to borrow funds when a bank is Dividend rateThe fixed or floating rate paid on preferred stock based on par value. Dollar-weighted rate of returnAlso called the internal rate of return, the interest rate that will make the Earnings before interest and taxes (EBIT)A financial measure defined as revenues less cost of goods sold Effective annual yieldAnnualized interest rate on a security computed using compound interest techniques. Effective call priceThe strike price in an optional redemption provision plus the accrued interest to the Effective convexityThe convexity of a bond calculated with cash flows that change with yields. Effective dateIn an interest rate swap, the date the swap begins accruing interest. Effective durationThe duration calculated using the approximate duration formula for a bond with an Effective margin (EM)Used with SAT performance measures, the amount equaling the net earned spread, or Effective rateA measure of the time value of money that fully reflects the effects of compounding. Effective spreadThe gross underwriting spread adjusted for the impact of the announcement of the common Equilibrium rate of interestThe interest rate that clears the market. Also called the market-clearing interest Exchange rateThe price of one country's currency expressed in another country's currency. Exchange Rate Mechanism (ERM)The methodology by which members of the EMS maintain their Exchange rate riskAlso called currency risk, the risk of an investment's value changing because of currency Federal funds rateThis is the interest rate that banks with excess reserves at a Federal Reserve district bank Fixed-exchange rateA country's decision to tie the value of its currency to another country's currency, gold Fixed-rate loanA loan on which the rate paid by the borrower is fixed for the life of the loan. Fixed-rate payerIn an interest rate swap the counterparty who pays a fixed rate, usually in exchange for a Floating exchange rateA country's decision to allow its currency value to freely change. The currency is not Floating-rate contractA guaranteed investment contract where the credit rating is tied to some variable Floating-rate note (FRN)Note whose interest payment varies with short-term interest rates. Floating-rate payerIn an interest rate swap, the counterparty who pays a rate based on a reference rate, Floating-rate preferredPreferred stock paying dividends that vary with short-term interest rates. Forward exchange rateExchange rate fixed today for exchanging currency at some future date. Forward interest rateinterest rate fixed today on a loan to be made at some future date. Forward rateA projection of future interest rates calculated from either the spot rates or the yield curve. Forward rate agreement (FRA)Agreement to borrow or lend at a specified future date at an interest rate Gross interestinterest earned before taxes are deducted. Growth ratesCompound annual growth rate for the number of full fiscal years shown. If there is a negative Historical exchange rateAn accounting term that refers to the exchange rate in effect when an asset or Hurdle rateThe required return in capital budgeting. Immunization strategyA bond portfolio strategy whose goal is to eliminate the portfolio's risk against a Implied repo rateThe rate that a seller of a futures contract can earn by buying an issue and then delivering Import-substitution development strategyA development strategy followed by many Latin American Incremental internal rate of returnIRR on the incremental investment from choosing a large project InterestThe price paid for borrowing money. It is expressed as a percentage rate over a period of time and Interest coverage ratioThe ratio of the earnings before interest and taxes to the annual interest expense. This Interest coverage testA debt limitation that prohibits the issuance of additional long-term debt if the issuer's Interest equalization taxTax on foreign investment by residents of the U.S. which was abolished in 1974. Interest paymentsContractual debt payments based on the coupon rate of interest and the principal amount. Interest on interestinterest earned on reinvestment of each interest payment on money invested. Interest-only strip (IO)A security based solely on the interest payments form a pool of mortgages, Treasury Interest rate agreementAn agreement whereby one party, for an upfront premium, agrees to compensate the Interest rate capAlso called an interest rate ceiling, an interest rate agreement in which payments are made Interest rate ceilingRelated: interest rate cap.
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