What is a Contractual Interest Rate?

A contractual interest rate is the specific rate included within the terms of a note payable or bond payable. This rate is multiplied by the face amount of the note or bond to derive the amount of interest actually paid to a note or bond holder. The contractual interest rate could vary substantially from the market interest rate.

Example of a Contractual Interest Rate

As an example of a contractual interest rate, a lender offers a borrower a $50,000 loan with a maturity date in 36 months. The contractual interest rate on this loan is 8% per year. The borrower accepts the arrangement, and is then obligated to pay the lender $4,000 per year in interest, which is calculated as follows:

8% Contractual interest rate x $50,000 Loan amount = $4,000 Interest payable per year