What is the Stated Interest Rate?

The stated interest rate is the interest rate listed on a bond coupon, or which is charged on a loan. This is the actual amount of interest paid by the bond issuer, or to be paid by the borrower to the lender. Thus, if the issuer pays $60 on a bond with a face value of $1,000, then the stated interest rate is 6%. The stated interest rate is a simple interest rate, since it does not include any interest rate compounding. However, a lender may include compounding elsewhere in its loan documents (such as compounding on a monthly basis); this increases the interest rate that a borrower will pay to the lender.

Stated Interest Rate vs. Effective Interest Rate

The effective interest rate is that rate of interest actually earned on an investment or loan over the course of a year, incorporating the effects of compounding. When interest is compounded frequently, the effective interest rate can rise dramatically, resulting in a much higher rate than the stated interest rate. When compounding occurs at annual intervals, then the stated interest rate and effective interest rate are the same.