Imputed Interest

AAA

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 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.

RELATED TERMS
  1. Accreted Value

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

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

    The increase in the value of a discounted instrument as time ...
  4. Accrued Interest

    1. A term used to describe an accrual accounting method when ...
  5. Accretion

    1. Asset growth through addition or expansion. 2. In reference ...
  6. Applicable Federal Rate - AFR

    Rates published monthly by the IRS for federal income tax purposes. ...
RELATED FAQS
  1. What metrics can be used to evaluate companies in the wholesale sector?

    The largest wholesale distribution industries include motor parts, commercial equipment, electronics, petroleum products, ... Read Full Answer >>
  2. Is the banking sector subject to any seasonal trends?

    The banking industry, including retail and investment banks, is subject to seasonal trends. Seasonality is most commonly ... Read Full Answer >>
  3. What countries are driving most of the growth of the Internet sector?

    The countries driving the bulk of the Internet sector’s growth are led by China, which is poised to have 800 million users ... Read Full Answer >>
  4. What measures can be used to evaluate the capital adequacy of a bank?

    The most commonly used assessment of a bank's capital adequacy is the capital adequacy ratio. However, many analysts and ... Read Full Answer >>
  5. What is the difference between fee-based advisors and commission-based advisors?

    The difference between a fee-based adviser and a commission-based adviser is that the former collects a flat fee for investment ... Read Full Answer >>
  6. How are contingent beneficiaries informed of a payout?

    One of the greatest tools in estate planning is beneficiary designation. Listing primary and contingent beneficiaries is ... Read Full Answer >>
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 ...

You May Also Like

Hot Definitions
  1. Fracking

    A slang term for hydraulic fracturing. Fracking refers to the procedure of creating fractures in rocks and rock formations ...
  2. Mixed Economic System

    An economic system that features characteristics of both capitalism and socialism.
  3. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  4. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  5. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  6. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
Trading Center