Net Effective Interest Rate

One method of measuring the benefit of patronage refunds and the capital plan is by computing the net effective interest rate. 

The following example can help explain how patronage reduces your effective interest rate.  The illustration assumes a new $1 million loan at 7%, patronage refunds of 1.00% of loans, to be distributed 65% in cash and 35% in stock and an 11-year retirement cycle.

Net Effective Interest Rate Reduction

Interest cost	$70,000
Equity purchase	0
Cash patronage	(6,500)
Net cash flow	$63,500

Less present value of retirement of:

Equity patronage	1,663
Net interest cost	$61,837
Net effective interest rate	6.18%
Net effective interest rate reduction	.82%

(Present value calculated using 7.00 percent loan rate.)

The effective interest rate on the CoBank loan, when patronage and the present value of future retirements are netted against interest cost, is reduced by 82 basis points, or 0.82% below the stated rate.