The market interest rate related to a bond is also called the…? This is a fun little quiz we are going to have. Last night, we had a record 531 attendees at our weekly webinar and we are very proud of that if I do say so myself. We have gotten investors from all different shapes and sizes and years of experience. One of the things I am most proud of, however, is the fact that Stony Brook Securities continues to attract more and more students under the age of 25.

These students do not know the ins and outs of financial markets just yet, however, they have the confidence and the interest to ask a lot of questions. Asking questions is the only way to learn more.

We were asked the question “the market interest rate related to a bond is also called the”? Let’s do a fun little post. I will give you four answers and you are going to tell me what you think the answer is going to be. Let’s have some fun!

### Bonds

Let’s get this out of the way before we get into our quiz. What are bonds exactly?

For starters bonds are debt. If we were to go ahead and buy the 30 Year US Treasury Bond right now…what would happen?

We would be buying the bond and going into a contract with the US government. Let’s say the bonds are yielding 3% right now for argument’s sake (they are actually yielding 2.872% according to CNBC). The contract/agreement goes as following.

We agree to hand over $100,000 to the US government.

They agree to take that money as debt (debt because they have to pay it back). And for that debt (loan) we are giving them, they agree to pay us 3% per year on that money. After 30 years, if the US does not default, we will also receive back the entire lump sum that we loaned them in the first place, or $100,000.

We will receive that 3% per year in yield payments broken up into two payments every year. This means we will receive two checks each year equal to $1500 each. $3000 a year times thirty years and we get a total of $90,000 in yield payments over the course of the thirty years we loaned the money to the government. If the government does not default, we will end up giving $100,000 and ending up with $190,000 when it is all said and done.

### The Market Interest Rate Related to a Bond is Also Called The?

We will have four options to choose from here. We will spend the rest of this article going through all of these four choices and ultimately deciding the winner to “the market interest rate related to a bond is also called the”?

Here are our four choices…

- Stated Interest Rate
- Effective Interest Rate
- Contract Interest Rate
- Straight-Line Rate

Put your thinking caps on! Here we go.

### Stated Interest Rate

According to Investopedia, the stated interest rate is…

A stated annual interest rate is the return on an investment that is expressed as a per-year percentage, and that does not account for compounding that occurs throughout the year.

Well said…kinda seems like a bond to me? While with a lot of work you can make bonds and their interest payments compounded, most people see bonds as instruments where one cannot take advantage of compounded interest.

### Effective Interest Rate

The effective interest rate, effective annual interest rate, or the effective rate, according to Wikipedia, is the…

Interest rate on a loan or financial product restated from the nominal interest rate as an interest rate with annual compound interest payable in arrears.

The way to think about the effective interest rate is the actual rate an investor receives. This means at the end of the day or at the maturity of a bond, whatever interest rate payment the investor actually received would be called the effective interest rate.

### Contract Interest Rate

According to MyAccountingCoach, the contract interest rate is the…

The contract rate; also called the coupon rate, stated rate, or nominal rate; is theinterest percentage listed on the face of a note or bond. In other words, this is theinterest rate that will be paid on the principle balance for the life of the note or bond.

The contract interest rate is the agreed upon interest rate at the time of the transaction. If a bond is yielding 3%, that is the contracted interest rate.

### Straight-Line Rate

According to Accounting Tools, the straight-line rate is the…

Pensive calculates the annual straight-line depreciation for the machine as: Purchase cost of $60,000 – estimated salvage value of $10,000 = Depreciable asset cost of $50,000. 1 / 5-year useful life = 20% depreciation rate per year. 20% depreciation rate x $50,000 depreciable asset cost = $10,000 annual depreciation.

To be honest, I have no idea what this means. It does not sound like it had to do with market interest rates at all. We are going to be nice and go ahead and say that the answer to the question “the market interest rate related to a bond is also called the” is not the straight-line rate.

### Market Interest Rate Related to a Bond?

Recall, here are our four potential answers:

- Stated Interest Rate
- Effective Interest Rate
- Contract Interest Rate
- Straight-Line Rate

Who do you think the winner is???

The winner is the **effective interest rate**!

But why is this the case? Because the effective interest rate is the interest rate that is set by the market. The interest rate set by the market is the truest representation of the current interest rate. Throughout the lifetime of a bond, things will happen that may not allow for the bond issuer to pay interest in full as well. Becuase the effective interest rate is the actual number the investor gets, the effective interest rate is the market interest rate.

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