What is the effective interest method used for?

The effective interest method is primarily used for calculating the amortized cost of financial instruments. This method enables companies to allocate interest income or expense over the life of a financial asset or liability in a way that reflects the time value of money, thus providing a more accurate representation of the financial instrument's carrying amount on the balance sheet.

Under this approach, the effective interest rate is the rate that exactly discounts expected future cash flows to the initial carrying amount of the financial instrument. This results in a streamlined calculation of interest that varies with the instrument’s carrying value each period, ensuring that the interest expense or income is recognized in a manner that reflects the actual earnings process.

In contrast, the other options do not align with the primary purpose of the effective interest method. Calculating the face value of an instrument pertains to determining its nominal or par value, which is not influenced by the effective interest method. Determining the market price of equity is related to equity valuations and market dynamics rather than the amortized cost of financial instruments. Measuring total profit involves a broader analysis of financial performance, which again is outside the specific focus of the effective interest method. Therefore, the use of this method is specifically targeted at achieving accurate amortization of financial instruments over time.