Effective profit rate method
The effective interest method is the method used by a bond buyer to account for accretion of a bond discount as the balance is moved into interest income or to amortize a bond premium into an interest expense. The effective interest rate uses the book value, or the carrying amount of the bond, The effective rate of return is the rate of interest on an investment annually when compounding occurs more than once. It is calculated through the following formula: Effective Rate Of Return = (1 + i/ n) n -1 Here; i stands for the annual interest rate Effective interest Rate also known as the effective annual interest rate is the rate of interest that is actually paid by the person or actually earned by the person on the financial instrument which is calculated by considering the effect of the compounding over the period of the time.