Effective interest method
Financial Accounting glossary · Liabilities & Bonds Payable
Definition
Bond amortization method that produces a constant yield on the carrying value over the life of the bond.
Effective interest method in plain English
When a company borrows money by issuing a bond, it often gets a slightly different amount of cash than the bond's face value, so the 'gap' has to be spread out over the bond's life — that spreading is called amortization. The effective interest method spreads it so that the interest expense you record is always the same true percentage (yield) of what you currently owe, rather than a flat dollar amount. It's the honest way: the cost each period tracks the real outstanding balance, like a mortgage where your interest is always figured on the balance still left, not a fixed guess. So the expense changes a little each period, but the underlying rate stays constant.
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