Legal Definitions - imputed interest

Imputed interest is a type of interest that is not actually paid, but is instead calculated and added to the cost of a loan or investment. This is done to account for the time value of money and to ensure that the lender or investor is compensated for the use of their funds.

For example, let's say that you borrow $10,000 from a friend and agree to pay it back in one year with no interest. However, if the prevailing interest rate is 5%, your friend could impute interest of $500 (5% of $10,000) and add it to the loan amount. This means that you would actually owe $10,500 at the end of the year.

Another example of imputed interest is when a company issues bonds with a below-market interest rate. In this case, the IRS may impute additional interest income to the bondholders to ensure that they are paying taxes on the full value of the investment.

Overall, imputed interest is a way to account for the time value of money and ensure that lenders and investors are fairly compensated for the use of their funds.