• The effective interest method is used to discount or write off a bond.

  • The amount of the discount on the bond is amortized as interest expense over the life of the bond. As the book value of a bond increases, the amount of interest expense increases.
  • The effective interest method takes into account the impact of the purchase price of a bond, and does not take into account only its face value or face value.
  • For lenders or investors, the effective interest rate reflects the actual rate of return much better than the nominal rate.
  • For borrowers, the effective interest rate reflects costs more effectively.
  • Unlike the real interest rate, the effective interest rate does not take inflation into account.