In connection with discount debt instruments, it is the interest that would be earned by holding an instrument to maturity. This interest is usually earned from coupon payments adjusted for changes in the instrument’s market value (plus or minus the market value) as the instrument gets closer to its redemption or par value.
Imputed interest is the estimated interest rate on an instrument, rather than the rate it carries. It is is the interest that a lender expects to collect, regardless of the actual interest the lender receives.
For internal revenue service (IRS), the concept of imputed interest revolves around the calculation of interest that a lender should have paid for tax purposes even if there were no actual interest received by that lender.
