Stated interest rate vs market interest rate
-Bonds can be issued at a premium or discount (an amount above or below the face amount of the bond) to equate the stated interest rate with the market interest rate. -The difference in cash proceeds from face value causes the "effective" interest rate to approximately equal the market rate. stated interest rate. This interest works according to the simple interest and does not take into account the compounding periods. Effective interest rate is the one which caters the compounding periods during a payment plan. It is used to compare the annual interest between loans with different compounding The stated interest rate is the interest rate that determines the amount of cash interest the borrower pays and the investor receives each year. The stated rate is the rate of interest actually designated on the face of a bond. The market interest rate is the rate that investors demand to earn for loaning their money.