Finance: What is Imputed Interest Rate?

The IRS taxes bondholders imputed interest based on whatever interest rate is imputed, or presumed, by the terms of the deal.

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Transcript

00:23

because taxes need to be collected Right We have pork

00:26

to buy for politicians Come on people Get with it

00:29

So we have a zero coupon bond here We bought

00:31

for five hundred bucks which comes do or pays off

00:34

in ten years for a thousand dollars on lee Remember

00:38

Zero coupon bonds don't pay any interest along the way

00:41

They just pay a one time end of period amount

00:44

which includes interest and principal The irs taxes Bondholders imputed

00:51

interest Yes like gains based on whatever interest rate is

00:55

imputed by the terms of the deal So in this

00:59

case remember that rule of seventy two thing so many

01:02

years to doubled about it into seventy two and all

01:04

that Yeah So in this case the money takes ten

01:07

years to double that's ten into seventy two paying seven

01:10

point two percent interest per year Compound it So the

01:15

irs would take as an imputed interest Five hundred box

01:20

times seven point two which is thirty six dollars of

01:23

taxable imputed interest games And they would take that each

01:27

year and you'd pay that each year on your taxes

01:29

So if you owned this bond and we're living in

01:32

a forty percent marginal tax bracket blue state which you

01:35

livin bitterly even though you got no cash interest from

01:39

this bond will you'd suffer a cash tax hit of

01:43

forty percent of thirty six or a bit under fifteen

01:46

dollars each year as you went along So that's the

01:49

bad news you pay the cash up front The good

01:51

news is that when the bond finally came do that

01:54

decade later for that grand well you have already paid

01:58

the taxes along the way And when taxes are already 00:02:01.504 --> [endTime] paid well we impute you'll be a happier camper