What is contractual interest rate?
The contractual interest rate is the interest the borrower must pay and the interest the lender receives, or more simply, it is the interest rate stated on a bond whereas the market interest rate is “the investors demand for loaning funds”. Therefore, bonds can either be sold at a premium, face value, or discount.
What is the difference between interest rate and effective interest rate?
An interest rate takes two forms: nominal interest rate and effective interest rate. The nominal interest rate does not take into account the compounding period. The effective interest rate does take the compounding period into account and thus is a more accurate measure of interest charges.
What is the meaning of effective interest rate?
The effective annual interest rate is the real return on a savings account or any interest-paying investment when the effects of compounding over time are taken into account. It is also called the effective interest rate, the effective rate, or the annual equivalent rate.
How do you calculate contractual interest rate?
The calculation for statutory/contractual interest is: (Debt x interest rate x the number of days late) /365.
What is the market rate of interest?
The market interest rate is the prevailing interest rate offered on cash deposits. This rate is driven by multiple factors, including central bank interest rates, the flow of funds into and out of a country, the duration of deposits, and the size of deposits.
Can effective interest rate be lower than nominal interest rate?
In general stated or nominal interest rate is less than the effective one. The nominal interest rate is the periodic interest rate times the number of periods per year. For example, a nominal annual interest rate of 12% based on monthly compounding means a 1% interest rate per month (compounded).
Is a higher effective interest rate better?
The effective annual rate is a value used to compare different interest plans. If two plans were being compared, the interest plan with the higher effective annual rate would be considered the better plan. The interest plan with the higher effective annual rate would be the better earning plan.
What is nominal interest rate and real interest rate?
A real interest rate is an interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower and the real yield to the lender or to an investor. A nominal interest rate refers to the interest rate before taking inflation into account.
What is nominal and effective interest rate?
Nominal interest rate is also defined as a stated interest rate. This interest works according to the simple interest and does not take into account the compounding periods. Effective interest rate is the one which caters the compounding periods during a payment plan.
What is the effective annual interest rate for 5% compounded semiannually?
Calculation
| Nominal annual rate | Frequency of compounding | |
|---|---|---|
| Semi-annual | Quarterly | |
| 5% | 5.063% | 5.095% |
| 10% | 10.250% | 10.381% |
| 15% | 15.563% | 15.865% |
What is the difference between stated interest rate and market interest rate?
The stated rate is the rate of interest actually designated on the face of a bond. The market interest rate is the rate that investors demand to earn for loaning their money.