Imputed Cost
Categories: Bonds
When you think about a cost, you probably think about spending money. You write a check, you get a good or service. That system represents the usual way things go.
That normal way of incurring a cost has a technical name. It's known as an explicit cost.
Another potential cost is known as the imputed cost, sometimes called the implicit cost. It's the cost paid by using something that a company or individual already has. It represents the opportunity cost of using something you have on hand.
You're babysitting your niece. She wants to play in the kiddie pool you have in your backyard. However, you haven't paid your water bill in a few months, and they turned off your water service. However, you have a few cases of bottled water in the basement (a remnant of your disaster planning phase).
So you fill the backyard pool with bottle after bottle of water from your basement. It doesn't require any cash on your part (there's no explicit cost). You had the water already.
However, there's an imputed cost. You no longer have the bottled water in your basement. To replace it, you'll have to go out and buy more. Also, if the apocalypse comes before you can get to CostCo, you might die of dehydration. Another (less quantifiable) imputed cost.
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Finance: What is Imputed Interest Rate?1 Views
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