Effective Interest Rate

Effective Interest Rate

Summary of Effective Interest Rate

Also known as the real interest rate, the return to capital derived by adjusting the nominal rate of interest for inflation. For example, a bond may bear a nominal rate of interest (the rate that the instrument pays) of 10 percent; by deducting the rate of inflation—say, 4 percent—we derive the effective rate, which is 6 percent.

(Main Author: William J. Miller)


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