The effective interest rate method is the accounting technique described in full under the effective interest rate method of amortization: interest income or expense is recognised each period by applying a single constant rate to the carrying amount of a financial asset or liability. The main entry gives the calculation and worked examples.
The shorter name is the one used in international standards. Under IFRS 9, the effective interest rate is the rate that exactly discounts the estimated future cash flows of an instrument over its expected life to its initial carrying amount. It takes in fees, transaction costs and any discount or premium, so these are spread over the life of the instrument instead of being recognised at once. The method is the basis of amortised cost accounting.
The same rate is used to discount expected shortfalls when measuring expected credit loss. For credit-impaired assets, interest is calculated on the net carrying amount after the loss allowance. The older phrasing, "of amortization", is common in United States textbooks on accounting for a bond discount or premium.