What is Effective Margin?
The effective margin is the profit margin that is gained from an asset, accounting for all financing costs of a prepayment and interest.
The effective margin determines potential profits if funds change but income remains constant.
The effective margin is the average spread over the underlying index that an investor anticipates to generate from a floating-rate security.
The simplest way of defining the effective margin is that it is the annual rate at which an investment increases in value when interest is credited more than once a year.
It is used with SAT performance measures – to determine the return a money manager makes over a specified time interval.
According to Nasdaq, effective margin is:
“Used with SAT performance measures, the amount equal to the net earned spread, or margin of income, on assets in excess of financing costs for a given interest rate and prepayment rate scenario.”
The word ‘margin’ in a general business context is the difference between the selling price of a product or service and its cost of production.
‘Margin’ is a widely used term in the world of business and finance. Basically, it refers to the difference between one price/cost and another price, generally related to how much money somebody or any entity can make.