Imputed Interest


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.

BREAKING DOWN '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.

  1. Discount Bond

    A bond that is issued for less than its par (or face) value, ...
  2. Compound Accreted Value - CAV

    A measure of the theoretical value of a zero-coupon bond at any ...
  3. Accreted Value

    The value, at any given time, of a multi-year instrument that ...
  4. Interest

    1. The charge for the privilege of borrowing money, typically ...
  5. Accretion of Discount

    The increase in the value of a discounted instrument as time ...
  6. Applicable Federal Rate - AFR

    Rates published monthly by the IRS for federal income tax purposes. ...
Related Articles
  1. Bonds & Fixed Income

    Junk Bonds: Everything You Need To Know

    Don't be fooled by the name - junk bonds may be for you if you know how to analyze them.
  2. Economics

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
  3. Investing

    The Advantages Of Bonds

    Bonds contribute an element of stability to almost any portfolio and offer a safe and conservative investment.
  4. Bonds & Fixed Income

    Corporate Bonds: An Introduction To Credit Risk

    Corporate bonds offer higher yields, but it's important to evaluate the extra risk involved before you buy.
  5. Bonds & Fixed Income

    3 Bonds You May Have Never Heard Of

    These lesser-known bonds may give your portfolio a boost when other investments products fall short.
  6. Retirement

    Understanding Credit Card Interest

    Paying these rates can impact your disposable income and your investment returns.
  7. Investing Basics

    What Investors Should Know About Interest Rates

    Understanding interest rates helps you answer the fundamental question of where to put your money.
  8. Options & Futures

    Dividends, Interest Rates And Their Effect On Stock Options

    Learn how analyzing these variables are crucial to knowing when to exercise early.
  9. Investing Basics

    Interest Rates And Your Bond Investments

    By understanding the factors that influence interest rates, you can learn to anticipate their movement and profit from it.
  10. Investing Basics

    Top 6 Uses For Bonds

    Individuals and institutions can use bonds in many ways: from the most basic, such as for preserving principal or saving and maximizing income, to more advanced uses, like managing interest-rate ...
  1. Can I borrow from my annuity to put a down payment on a house?

    You can borrow from your annuity to put a down payment on a house, but be prepared to pay an assortment of fees and penalties. ... Read Full Answer >>
  2. Why is the Cayman Islands considered a tax haven?

    The Cayman Islands is one of the most well-known tax havens in the world. Unlike most countries, the Cayman Islands does ... Read Full Answer >>
  3. Can mutual funds invest in hedge funds?

    Mutual funds are legally allowed to invest in hedge funds. However, hedge funds and mutual funds have striking differences ... Read Full Answer >>
  4. Why is Luxembourg considered a tax haven?

    Luxembourg has been the tax haven of choice for many corporations and mega-rich individuals around the world since the 197 ... Read Full Answer >>
  5. Who decides to print money in Canada?

    In Canada, new money comes from two places: the Bank of Canada (BOC) and chartered banks such as the Toronto Dominion Bank ... Read Full Answer >>
  6. What are the main kinds of annuities?

    There are two broad categories of annuity: fixed and variable. These categories refer to the manner in which the investment ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  2. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  3. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  4. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  5. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
  6. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!