The effective rate is the interest rate that bondholders receive.
An investor or the owner of debt instruments, which are frequently issued by corporations and governments, is known as a bondholder. In essence, bondholders are lending money to the bond issuers. Bond holders receive their principal investment back when the bonds mature in exchange.
A bond issuer technically borrows the money, while the bondholder technically lends it. Bond holders get periodic interest payments from the bond issuer (which may be paid annually or semi-annually) up until the bond's maturity, at which point the issuer repays the bondholder with the principle borrowed.
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