Face Interest Rate

January 1, 1 5 min read Face Interest Rate Loan Documents Nominal Interest Rate Mortgages APR Effective Rate Financial Terms Lending
The face interest rate is the percentage interest specified on the loan documents, representing the nominal annual interest rate before accounting for additional fees or compounding periods. This term is often compared with the Annual Percentage Rate (APR) and the Effective Rate.
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Face Interest Rate

Definition

The face interest rate is the nominal annual percentage rate specified on loan documents. This rate is crucial for borrowers as it determines the interest portion of periodic loan payments. These payments are decided without considering additional costs, fees, or specific compounding methods, in contrast to the effective interest rate or the annual percentage rate (APR).

Examples

  1. Fixed-Rate Mortgage: If a borrower takes a fixed-rate mortgage with a loan amount of $200,000 and a face interest rate of 3.5%, the monthly interest portion of the payment will be based on this 3.5% annual rate.
  2. Corporate Bond: A corporate bond issued with a face interest rate of 6% means holders of this bond will receive 6% of the bond’s face value annually.

Frequently Asked Questions

Q1: Is the Face Interest Rate the same as APR?

  • No, the Annual Percentage Rate (APR) includes additional fees and costs associated with the loan, whereas the face interest rate is simply the nominal annual rate specified on the loan documents.

Q2: How does the Face Interest Rate affect my loan payments?

  • The face interest rate directly affects the interest portion of your periodic loan payments but does not account for additional fees or the effect of compounding.

Q3: Can the Face Interest Rate change over time?

  • For fixed-rate loans, the face interest rate remains constant for the duration of the loan. However, for variable or adjustable-rate loans, the face interest rate can change based on market conditions.

Q4: How do I compare loans with different Face Interest Rates?

  • To effectively compare loans, consider both the face interest rate and the APR to understand total borrowing costs, including fees and compounding effects.
  • Annual Percentage Rate (APR): The APR reflects the total cost of borrowing by including the face interest rate plus additional costs or fees spread over the life of the loan.
  • Effective Rate: The effective interest rate accounts for compounding periods within a year, providing a more accurate measure of total interest cost than the face interest rate.
  • Amortization: The process of spreading out a loan into a series of fixed payments over time.

Online Resources

References

  1. Luenberger, D. G. (2014). Investment Science. Oxford University Press.
  2. Fabozzi, F. J. (2018). Bond Markets, Analysis, and Strategies. Pearson.
  3. Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2018). Corporate Finance. McGraw-Hill.

Suggested Books for Further Studies

  1. “Financial Markets and Institutions” by Frederic S. Mishkin
  2. “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
  3. “Fixed Income Analysis” by Barbara S. Petitt and Jerald E. Pinto

Face Interest Rate Fundamentals Quiz

### Is the face interest rate synonymous with the APR? - [ ] Yes, they mean the same thing. - [x] No, the APR includes additional costs. - [ ] Yes, both reflect additional costs. - [ ] No, the APR is always higher. > **Explanation:** The face interest rate is the nominal annual interest rate specified in the loan agreement, while the APR includes additional fees and costs related to obtaining the loan. ### What does the face interest rate not account for? - [ ] Principal balance - [x] Additional fees - [ ] Loan term - [ ] Borrower's credit score > **Explanation:** The face interest rate does not account for additional fees or costs associated with obtaining the loan. ### On what type of loans do face interest rates remain constant? - [x] Fixed-rate loans - [ ] Adjustable-rate loans - [ ] Balloon loans - [ ] Variable-rate loans > **Explanation:** For fixed-rate loans, the face interest rate remains constant for the entire duration of the loan term. ### How often is interest calculated using the face rate in fixed-rate mortgages? - [ ] Annually - [ ] Quarterly - [x] Monthly - [ ] Daily > **Explanation:** In fixed-rate mortgages, interest is typically calculated monthly using the face interest rate. ### What type of interest rate includes the impact of compounding? - [ ] Face interest rate - [ ] APR - [x] Effective interest rate - [ ] Prime interest rate > **Explanation:** The effective interest rate includes the effect of compounding periods within a timeframe, giving a true annual interest cost. ### Where can you find the face interest rate? - [ ] On the borrower's credit report - [x] On the loan documents - [ ] On the property appraisal report - [ ] On the insurance declaration page > **Explanation:** The face interest rate is specified on loan documents provided to the borrower. ### How can you compare loans from different lenders effectively? - [ ] By comparing the face interest rates alone - [ ] By looking at only the loan terms - [x] By comparing both the face interest rates and APRs - [ ] By examining additional fees independently > **Explanation:** Comparing both the face interest rates and APRs allows for a more comprehensive understanding of total loan costs. ### What element, together with the face interest rate, determines the monthly interest portion of a mortgage payment? - [ ] Loan application fees - [ ] Insurance costs - [x] Loan principal balance - [ ] Closing fees > **Explanation:** The face interest rate together with the principal balance of the loan determines the monthly interest portion of a mortgage payment. ### In variable-rate loans, how often can the face interest rate change? - [ ] Every day - [x] Varies depending on loan terms - [ ] Never - [ ] Once at closing > **Explanation:** In variable-rate loans, the face interest rate can change according to the specific terms outlined in the loan agreement. ### What is necessary to synch payment intervals with the face interest rate in an amortizing loan? - [ ] Adjust loan terms every year - [ ] Only consider principal balance annual adjustments - [ ] Match borrower’s income pattern - [x] Divide the annual rate into respective intervals > **Explanation:** To synchronize payment intervals with the face interest rate in an amortizing loan, divide the annual rate accordingly by appropriate intervals (e.g., monthly, if payments are monthly).
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