Effective Interest Rate Meaning

Accounting glossary · Understand, connect, apply

The effective interest rate discounts estimated future payments or receipts over the expected life of an instrument to the relevant initial carrying amount. The usual calculation excludes expected credit losses.

Example

A one-year loan yields 1,050 at maturity and the lender initially recognises 1,000 with no other cash flows. The effective annual rate is 5%.

Remember the difference

Fees integral to the yield and initial premiums or discounts can make the rate differ from the coupon. IFRS 9 uses a credit-adjusted rate for certain assets.

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Prepared with AI assistance. Examples are fictional and simplified for learning.

Examples are simplified for learning. Where a term depends on US law, IFRS, US GAAP or a historical rule, check the context explained above and the requirements relevant to your course.

Study references: OpenStax financial accounting and managerial accounting. For reporting requirements, consult the applicable IFRS Standards or FASB guidance. US tax terms should be checked against the relevant tax-year IRS instructions.

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