Stated interest rate definition
/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.
In addition to the stated interest rate, a lender may also charge a borrower with other fees, such as a loan origination fee, that increase the total effective rate being charged.
Where is the Stated Interest Rate Used?
The stated interest rate is used in financial instruments such as bonds, loans, and leases to determine the periodic interest payments due. In bonds, it is applied to the face value to calculate fixed interest payments made to bondholders. In loans, lenders use it to define the base interest charge before considering compounding or fees. It is also a key term disclosed in promissory notes and debt agreements to define the contractual borrowing cost.
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Stated Interest Rate FAQs
What is the difference between the stated interest rate and effective interest rate?
The stated interest rate is the contractual rate printed on a loan, bond, or note, and it determines the periodic cash interest payments. The effective interest rate is the actual yield earned or incurred after considering discounts, premiums, compounding, and issuance costs, so it reflects the true economic cost or return.