Effective Interest Method Calculator (Amortized Cost Schedule)

How it works

Effective rate per period i solves: initial carrying amount = Σ cash interest × (1 + i)⁻ᵗ + face × (1 + i)⁻ᴺ · interest expense = opening carrying amount × i · amortization = interest expense − cash interest · closing carrying amount = opening + amortization

Under IFRS 9 and US GAAP (ASC 835-30), loans, bonds and other financial liabilities or assets measured at amortized cost recognize interest with the effective interest method. The effective interest rate is the rate that exactly discounts all future cash payments to the initial carrying amount — so transaction costs, origination fees and issue discounts or premiums are spread over the life of the instrument instead of being expensed at once. Each period’s interest expense is the carrying amount times that rate; the gap between it and the cash coupon is the amortization that moves the carrying amount toward face value at maturity.

Worked example

A 100,000 five-year loan with a 5% annual coupon, received net of 2,000 of fees (98,000), has an effective interest rate of 5.4679% — the rate at which 5,000 a year for five years plus 100,000 at the end is worth exactly 98,000. Year 1 interest expense is 98,000 × 5.4679% = 5,358.58: 5,000 is paid in cash and 358.58 amortizes the 2,000 discount, lifting the carrying amount to 98,358.58. Over the term, total interest expense is 25,000 + 2,000 = 27,000.

Sources: IFRS Foundation — IFRS 9 Financial Instruments (Appendix A: effective interest rate) · Wikipedia — Effective interest rate

Frequently asked questions