The yield on a debt as calculated from the purchase price. A more accurate measure of the return on a bond investment than the simple coupon payment. Computed using both the capital gain from price appreciation and the bond's yield.
The actual yield of interest as opposed to the stated rate. For deposits, the effective rate of interest is based on the accounting method used to compute interest and the frequency of compounding. For loans, the effective rate is the stated interest rate plus fees and charges prorated over the estimated life of the mortgage, usually ten years.... read full article
A term used in two ways. In one context it refers to a measure of interest cost to the borrower that is identical to the APR except that it is calculated over the time horizon specified by the borrower. The APR is calculated on the assumption that the loan runs to term, which most loans do not. (See Interest Cost). QuickenMortgage uses the term in this way. In most texts on the mathematics of finance, however, the "effective rate" is the quoted rate adjusted for intra-year compounding. For example, a quoted 6% mortgage rate is actually a rate of .5% per month, and if interest received in the early months is invested for the balance of the year at .5%, it results in a return of 6.17% over the year. The 6.17% is called the "effective rate" and 6% is the "nominal" rate.
Yield on a debt instrument that is calculated by using the purchase price, the coupon rate, the number of days between interest payments, and the length of time until maturity. Because these other factors are considered in determining the yield, the effective rate represents a more accurate yield than the coupon rate. See: Coupon Rate; Debt Instrument; Rate Of Return
The effective rate is a consumer-oriented rate that takes into account the projected amount of time you tell us you will actually have the loan, as well as the specific costs, fees, and potential rate changes associated with it. The fees and costs are distributed over the time you plan to be in the house, allowing you to do an apples-to-apples comparison of a variety of loan types. The effective rate is not the APR. It is similar in that it factors in interest, mortgage insurance, and other fees (including points); however, the APR assumes that you keep your loan for the entire term, while the effective rate takes into account how long you tell us you plan to be in your house.
Calculated yield on a debt instrument which uses the purchase price of the security. The effective rate is determined by the price, the coupon rate, the time between interest payments, and the time until maturity.