Effective Rate

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Effective Rate

Another name for annual percentage rate that refers to the amount of yearly interest to be charged by a lender on the money borrowed by a debtor.

In federal Income Tax law, the actual tax rate that an individual taxpayer pays based upon his or her taxable income.

Federal income tax laws increase the rate of taxation as a taxpayer reaches certain marginal income levels. For example, taxpayers might pay a tax rate of 20 percent on the first $10,000 of taxable income. Thereafter, any increase in income up to an additional $5,000 might be taxable at a rate of 22 percent on that $5,000. The effective rate of tax is computed by dividing the total amount of tax paid by the total of the person's taxable income, adding the tax paid on the person's first $10,000 at a 20 percent rate to the tax paid on the next $5,000 that is at a 22 percent rate. The effective rate is not an average of the tax rates imposed since the average does not take into account the differences in the marginal income levels. A taxpayer's effective tax rate is, however, more than the person's bottom marginal rate but less than his or her top marginal rate.

West's Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc. All rights reserved.
References in periodicals archive ?
Knowing how to compute a correct effective interest rate (YTM) is important in order to properly compute effective interest earned for bond buyers.
The majority of India's states experienced nominal growth rates significantly above nominal effective interest rates payable on their public debt.
However, if the capital partner's minority profit share (which could be very lucrative if the business is successful) or ownership share are recharacterized by a court as interest, the effective interest rate may render a transaction usurious.
This new financing strengthened the balance sheet and significantly reduced the overall effective interest rate of the company's recourse debt from 10.4 percent as of Dec.
On the one hand, because the effective interest rate (after tax deductions) you are paying on borrowed money is relatively low, it may not be too difficult to earn a higher after-tax return, depending on the investments.
When translated into an effective interest rate, the cost of the loan can range anywhere from 67 to 774 percent, according to the Consumer Federation of America and the National Consumer Law Center.
* Performing analytical procedures.(12) For example, the absence of a material difference from an expectation that interest income will be a fixed percentage of a debt security based on the effective interest rate determined when the entity purchased the security provides evidence about existence of the security.
Equalizing the rates would "provide a better mechanism for achieving the equivalent effective interest rate goal than the net zero interest rate approach of current law." Id.
Increasing the base means to bring down effective interest rate further.
Alternatively, one could imagine making the opposite conversion, calculating the effective interest rate implied by a given set of up-front fees.
Use of Currency Forwards To Lock in an Effective Interest Rate in Foreign Borrowing
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