What is a 'Stated Annual Interest Rate'

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. The effective annual interest rate, on the other hand, does account for intra-year compounding that can occur on a daily, monthly or quarterly basis. Typically, the effective annual interest rate will lead to higher returns than the stated annual interest rate due to the power of compounding. Investors can compare products and calculate which type of interest will offer the most favorable return.

BREAKING DOWN 'Stated Annual Interest Rate'

A $10,000, one-year certificate of deposit with a stated annual interest rate of 10% will earn $1,000 at maturity. If the money was placed in an interest-earning savings account that paid 10% compounded monthly, the account will earn interest at a rate of 0.833% each month (10% divided by 12 months; 10/12 = 0.833). Over the course of the year, this account will earn $1,047.13 in interest, at an effective annual interest rate of 10.47%, which is notably higher than the returns on the 10% stated annual interest rate of the certificate of deposit used in the example.

RELATED TERMS
  1. Compound Return

    The rate of return, usually expressed as a percentage, that represents ...
  2. Annualize

    1. To convert a rate of any length into a rate that reflects ...
  3. Continuous Compounding

    The process of earning interest on top of interest. The interest ...
  4. Anticipated Interest

    The amount of interest that a savings vehicle will accrue by ...
  5. Rule Of 72

    A shortcut to estimate the number of years required to double ...
  6. Annual Return

    The return an investment provides over a period of time, expressed ...
Related Articles
  1. Investing

    The Effective Annual Interest Rate

    The effective annual interest rate is a way of restating the annual interest rate so that it takes into account the effects of compounding.
  2. Investing

    Accelerating Returns With Continuous Compounding

    Investopedia explains the natural log and exponential functions used to calculate this value.
  3. Investing

    Learn Simple And Compound Interest

    Interest is defined as the cost of borrowing money, and depending on how it is calculated, can be classified as simple interest or compound interest.
  4. Investing

    Explaining Interest

    Interest is the price charged to borrow money, and is typically expressed as a percentage of the principal, or the amount loaned.
  5. Investing

    Overcoming Compounding's Dark Side

    Understanding how money is made and lost over time can help you improve your returns.
  6. Financial Advisor

    Compound Annual Growth Rate (CAGR)

    The compound annual growth rate is an important tool for measuring investment performance and comparing it across asset classes. Discover how it is calculated and how it can inform your investment ...
  7. Investing

    How To Calculate Your Investment Return

    How much are your investments actually returning? Find out why the method of calculation matters.
  8. Investing

    4 Ways Simple Interest Is Used In Real Life

    Simple interest works in your favor when you're a borrower, but against you when you're an investor.
  9. Managing Wealth

    Dissecting the Simple Interest Formula

    Simple interest ignores the effect of compounding: it's only calculated on the principal amount. This makes it easier to calculate than compound interest.
  10. Retirement

    Using Compounding to Boost Retirement Savings

    Allowing growth on your investments to compound over time gives you immense returns when saving for retirement.
RELATED FAQS
  1. What is the difference between stated annual return and effective annual return?

    Essentially, the effective annual return accounts for intra-year compounding, and the stated annual return does not. The ... Read Answer >>
  2. What formula can I use to calculate interest on interest?

    Find out more about compounding interest, what it measures and how to calculate the amount of compound interest accrued using ... Read Answer >>
  3. How do mutual funds compound interest?

    Learn how mutual funds can grow wealth over time through the magic of compound interest by reinvesting dividends back into ... Read Answer >>
  4. What is the rationale behind the effective interest rate?

    Read about the reasons why market actors identify the effective interest rate as it pertains to investing, lending and accounting. Read Answer >>
Hot Definitions
  1. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  2. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  3. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  4. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
  5. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
  6. Tax Refund

    A tax refund is a refund on taxes paid to an individual or household when the actual tax liability is less than the amount ...
Trading Center