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§

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.
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§

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

Suggested Books for Further Studies§

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