what is imputed interest

Imputed interest is a term used in tax law to describe a situation where a lender charges no interest or a lower interest rate than the market rate, but the IRS considers the loan to have been made at an interest rate that is implied by market conditions. This can happen when a lender charges a lower interest rate than the market rate, or when a borrower receives a loan from a family member or friend at a below-market interest rate. The IRS uses imputed interest to collect tax revenues on loans or securities that pay little or no interest. It is important for discount bonds, such as zero-coupon bonds, and other securities sold below face value and mature at par