An imputed interest rate is an estimated interest rate used instead of the established interest rate associated with a debt. An imputed rate is used because the established rate does not accurately reflect the market rate of interest, or there is no established rate at all. The imputed rate approximates the rate used for a note having an independent borrower and lender, and with comparable terms and conditions. This situation most commonly arises when funds are loaned between related parties, where no interest rate has been charged at all.
The intent of using an imputed interest rate is to more accurately reflect the components of an exchange transaction, so that the resulting face amount of a note reasonably represents the present value of the consideration paid.
Selecting a justifiable imputed interest rate is a matter of some importance, since an incorrect interest rate that is applied to a sufficiently large and long-term debt can result in the inaccurate acceleration or deferral of earnings.