Final answer:
The effective rate is the actual interest incurred on a bond payable, and it may differ from the bond's stated interest rate due to changing market conditions.
Step-by-step explanation:
The rate of interest that actually is incurred on a bond payable is called the effective rate. The effective rate, also known as the market rate, is the return that investors actually earn on the bonds they purchase, which can differ from the interest rate stated on the bond (stated rate, contract rate, or face rate). This rate reflects the current market conditions and the actual rate of return on the bond, influenced by factors such as changes in market interest rates and the credit quality of the issuer.
Bonds are essentially debt securities that promise to return the face value of the bond at maturity, along with periodic interest payments based on the coupon rate. However, the fluctuation of market interest rates can make the effective rate vary from the coupon rate, affecting the bond's present value and attractiveness to investors.