Effective Annual Interest Rate

Finance allah shmoop What is imputed interest rate Imputed guest

at or presumed based on x y and z that's

the foundation of an imputed interest rate and its chief

cheerleader Yep It's the i r s the tax people

those guys you just love to hear from Why Well

because taxes need to be collected Right We have pork

to buy for politicians Come on people Get with it

So we have a zero coupon bond here We bought

for five hundred bucks which comes do or pays off

in ten years for a thousand dollars on lee Remember

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

They just pay a one time end of period amount

which includes interest and principal The irs taxes Bondholders imputed

interest Yes like gains based on whatever interest rate is

imputed by the terms of the deal So in this

case remember that rule of seventy two thing so many

years to doubled about it into seventy two and all

that Yeah So in this case the money takes ten

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

point two percent interest per year Compound it So the

irs would take as an imputed interest Five hundred box

times seven point two which is thirty six dollars of

taxable imputed interest games And they would take that each

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

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

a forty percent marginal tax bracket blue state which you

livin bitterly even though you got no cash interest from

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

forty percent of thirty six or a bit under fifteen

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

bad news you pay the cash up front The good

news is that when the bond finally came do that

decade later for that grand well you have already paid

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