Effective Interest Rate Calculator
When a note is issued at a discount, a premium, or with costs, the stated rate isn't what it really costs. This finds the real rate and builds the effective-interest schedule and entries.
Ben / Reviewed Sep 27, 2026 / v2.0.0
Results
Showing the numbers you calculated- Effective rate per period
- 0.6795%
- Stated: 0.5000% per period
- Effective annual rate
- 8.47%
- Compounded · stated rate compounded: 6.17%
- Nominal annual rate
- 8.15%
- Periodic rate × payments per year
- To amortize
- $5,000.00
- Discount $5,000.00 + costs $0.00
- Total interest expense
- $20,996.84
- Cash interest $15,996.84
- Net proceeds
- $95,000.00
- Cash received − issuance costs
- Regular payment
- $1,933.28
- Matures 01/01/2031
Effective-interest schedule
Swipe the table sideways to see all 7 columns.
| # | Date | Cash interest | Interest expense | Amortization | Principal repaid | Carrying amount |
|---|---|---|---|---|---|---|
| 1 | 02/01/2026 | $500.00 | $645.55 | $145.55 | $1,433.28 | $93,712.27 |
| 2 | 03/01/2026 | $492.83 | $636.80 | $143.97 | $1,440.45 | $92,415.79 |
| 3 | 04/01/2026 | $485.63 | $627.99 | $142.36 | $1,447.65 | $91,110.50 |
| 4 | 05/01/2026 | $478.39 | $619.12 | $140.73 | $1,454.89 | $89,796.34 |
| 5 | 06/01/2026 | $471.12 | $610.19 | $139.07 | $1,462.16 | $88,473.25 |
| 6 | 07/01/2026 | $463.81 | $601.20 | $137.39 | $1,469.47 | $87,141.17 |
| 7 | 08/01/2026 | $456.46 | $592.15 | $135.69 | $1,476.82 | $85,800.04 |
| 8 | 09/01/2026 | $449.08 | $583.03 | $133.95 | $1,484.20 | $84,449.79 |
| 9 | 10/01/2026 | $441.66 | $573.86 | $132.20 | $1,491.62 | $83,090.37 |
| 10 | 11/01/2026 | $434.20 | $564.62 | $130.42 | $1,499.08 | $81,721.71 |
| 11 | 12/01/2026 | $426.70 | $555.32 | $128.62 | $1,506.58 | $80,343.75 |
| 12 | 01/01/2027 | $419.17 | $545.96 | $126.79 | $1,514.11 | $78,956.43 |
| 13 | 02/01/2027 | $411.60 | $536.53 | $124.93 | $1,521.68 | $77,559.68 |
| 14 | 03/01/2027 | $403.99 | $527.04 | $123.05 | $1,529.29 | $76,153.44 |
| 15 | 04/01/2027 | $396.34 | $517.48 | $121.14 | $1,536.94 | $74,737.64 |
| 16 | 05/01/2027 | $388.66 | $507.86 | $119.20 | $1,544.62 | $73,312.22 |
| 17 | 06/01/2027 | $380.94 | $498.18 | $117.24 | $1,552.34 | $71,877.12 |
| 18 | 07/01/2027 | $373.17 | $488.42 | $115.25 | $1,560.11 | $70,432.26 |
| 19 | 08/01/2027 | $365.37 | $478.60 | $113.23 | $1,567.91 | $68,977.58 |
| 20 | 09/01/2027 | $357.53 | $468.72 | $111.19 | $1,575.75 | $67,513.02 |
| 21 | 10/01/2027 | $349.66 | $458.77 | $109.11 | $1,583.62 | $66,038.51 |
| 22 | 11/01/2027 | $341.74 | $448.75 | $107.01 | $1,591.54 | $64,553.98 |
| 23 | 12/01/2027 | $333.78 | $438.66 | $104.88 | $1,599.50 | $63,059.36 |
| 24 | 01/01/2028 | $325.78 | $428.50 | $102.72 | $1,607.50 | $61,554.58 |
Annual summary
Swipe the table sideways to see all 5 columns.
| Year | Cash interest | Interest expense | Amortization | Year-end carrying amount |
|---|---|---|---|---|
| 2026 | $5,099.88 | $6,609.83 | $1,509.95 | $80,343.75 |
| 2027 | $4,521.95 | $5,914.97 | $1,393.02 | $63,059.36 |
| 2028 | $3,369.97 | $4,451.64 | $1,081.67 | $44,311.64 |
| 2029 | $2,146.95 | $2,864.45 | $717.50 | $23,976.73 |
| 2030 | $848.47 | $1,142.91 | $294.44 | $1,920.28 |
| 2031 | $9.62 | $13.04 | $3.42 | $0.00 |
Suggested journal entries (issuer)
Suggested entries for your records — adjust account names to your chart of accounts.
| Account | Debit | Credit |
|---|---|---|
| 01/01/2026 — Issue the note (net of any discount, premium, and issuance costs) | ||
| Cash | $95,000.00 | |
| Unamortized discount and issuance costs | $5,000.00 | |
| Notes payable | $100,000.00 | |
| Totals | $100,000.00 | $100,000.00 |
| 02/01/2026 — Payment 1 — interest expense at the effective rate | ||
| Interest expense | $645.55 | |
| Notes payable | $1,433.28 | |
| Cash | $1,933.28 | |
| Unamortized discount and issuance costs | $145.55 | |
| Totals | $2,078.83 | $2,078.83 |
| 01/01/2031 — Final payment (#60) — the discount/premium is fully amortized | ||
| Interest expense | $13.04 | |
| Notes payable | $1,923.70 | |
| Cash | $1,933.32 | |
| Unamortized discount and issuance costs | $3.42 | |
| Totals | $1,936.74 | $1,936.74 |
What this does
A note says 6%, but you only got $95,000 for a $100,000 promise — so it really costs more than 6%. This figures out the real (effective) rate and spreads the difference over the life of the note the way GAAP wants: the interest method.
You get the schedule (cash interest, interest expense, amortization, carrying amount), an annual summary, and journal entries that actually balance.
How the math works
First, the effective rate: the one rate that makes every payment you'll make worth exactly the cash you got today.
effective rate = IRR(−net proceeds, payment 1, …, payment n)
Then every period:
cash interest = face balance × stated rate interest expense = carrying amount × effective rate amortization = interest expense − cash interest carrying amount = face balance − unamortized discount
With a discount the carrying amount climbs toward what you owe; with a premium it falls toward it. Either way it lands exactly on the face amount paid off.
"Annual rate" can mean two things: the periodic rate × 12 (nominal) or compounded (effective). Both are shown, and the fair comparison is effective vs. the stated rate compounded the same way.
Check my math: a worked example
A $100,000 note at 6.00% for 5 years (monthly payments) brings in $95,000.
- Net proceeds: $95,000.00, so $5,000.00 of discount and costs to amortize.
- Effective rate: 0.6795% per period — 8.47% a year compounded (vs. 6.17% for the stated rate compounded the same way).
- Payment 1: cash interest $500.00 (face × stated rate), interest expense $645.55 (carrying amount × effective rate), so $145.55 of amortization.
- Over the whole term: $15,996.84 of cash interest + $5,000.00 of amortization = $20,996.84 of interest expense.
The amortization is what makes the books tell the truth: the discount was really just interest paid up front.
These numbers come straight from the calculator using its example inputs — if the math ever changes, this example changes with it.
Mistakes I see a lot
- Calculating cash interest on the carrying amount. Cash interest is always on the face balance at the stated rate; only the expense uses the carrying amount.
- Using straight-line when the difference is material. GAAP's default is the interest method.
- Comparing a nominal effective rate to a compounded one (or vice versa). Pick one convention for both.
- Booking a premium like a discount. A premium lowers interest expense, so its amortization runs the other way.
Questions people ask
- What's the difference between a discount and issuance costs?
- A discount is the lender or investors paying less than face; issuance costs are fees you paid to others. Under current GAAP both reduce the carrying amount of the debt and are amortized the same way, so this lumps them together.
- Why is the first period's amortization the biggest (or smallest)?
- Because the expense is carrying amount × rate, and the carrying amount changes each period. For an amortizing note it falls as principal is repaid; for a bullet it climbs toward face.
- Is this the same as APR?
- Close in spirit — both fold fees into the rate — but APR follows lending-disclosure rules. The effective interest rate here is the accounting rate used for the books.
- Does the spreadsheet recalculate?
- Yes. The effective rate is a live IRR() of the cash flows, and the schedule, annual summary, and entries all follow the Inputs sheet.
Assumptions and limits
- The effective periodic rate is the IRR of the net cash received (cash received − issuance costs) and every contractual payment. It's the one rate that makes the payments worth exactly what you got.
- Cash interest = the outstanding face balance × the stated rate per period. Interest expense = the carrying amount × the effective rate. The difference amortizes the discount/costs (or premium).
- Both annual versions are shown: nominal (periodic × payments per year) and effective (compounded). Compare the effective annual rate to the stated rate compounded the same way.
- Payments follow the loan engine with lender-style rounding; each period's expense is rounded to the cent and the last period absorbs the leftover so the carrying amount ends at exactly the face paid off.
- Entries are from the issuer's (borrower's) side. A holder records the mirror image as interest income.
- Fixed rate, no prepayment, no fair-value option, no variable-rate resets.
Disclaimer: Educational and planning use only. Results depend on what you enter and may not match your lender, your tax return, or professional accounting treatment. Informational content + opinions only — not tax/legal advice.