effective rate

Definition

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.

Use effective rate in a sentence

The effective rate on the debentures issued by ABC Corporation is higher than coupon rate as the bonds are selling for below par value.

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Based on the purchase price, John was receiving an effective rate of five percent per year. This was a pretty good return considering the economy.

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Bonds investors care little about coupon rates and more about effective rates because bonds constantly reprice according to market rates of interest.

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effective income tax rate bias