Imputed Interest

Filed Under:
Dictionary Says

Definition of 'Imputed Interest'


A term that describes interest that is considered to be paid for tax purposes even though no interest payment has been made. Imputed interest is used by the Internal Revenue Service (IRS) as a means of collecting tax revenues on loans or securities that do not pay interest, or where the stated interest is particularly low. Imputed interest is calculated based on the actual payments that will be - but have not yet been - paid. The interest is important for discount bonds, such as zero-coupon bonds, and other securities that are sold below face value and mature at par.



Investopedia Says

Investopedia explains 'Imputed Interest'


The IRS uses an accretive method to calculate the imputed interest on Treasury bonds, which are taxed yearly even though no interest is paid prior to maturity. To generate taxes on interest income that may or may not have been paid (such as with no-interest loans between family members), the IRS established Applicable Federal Rates (AFR) with the Tax Act of 1984, which sets a minimum interest rate for any loan that is made below a specified interest rate level. Each month, the IRS publishes base interest rates known as the Applicable Federal Rates, which are used for imputed interest and original issue discount rules.

comments powered by Disqus
Hot Definitions
  1. Earnings Call

    A conference call between the management of a public company, analysts, investors and the media to discuss the financial results during a given reporting period such as a quarter or a fiscal year.
  2. Legal Monopoly

    A company that is operating as a monopoly under a government mandate. A legal monopoly offers a specific product or service at a regulated price and can either be independently run and government regulated, or government run and regulated.
  3. Closed-End Fund

    A closed-end fund is a publicly traded investment company that raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed and traded like a stock on a stock exchange.
  4. Payday Loan

    A type of short-term borrowing where an individual borrows a small amount at a very high rate of interest. The borrower typically writes a post-dated personal check in the amount they wish to borrow plus a fee in exchange for cash.
  5. Securitization

    The process through which an issuer creates a financial instrument by combining other financial assets and then marketing different tiers of the repackaged instruments to investors.
  6. Economic Forecasting

    The process of attempting to predict the future condition of the economy. This involves the use of statistical models utilizing variables sometimes called indicators.
Trading Center