<klink type="cncpt">Tell me about imputed interest</klink>
</index>
<content>
<p>Some investments, such as zero-coupon bonds, don't pay interest until maturity. Even though investors receive no interest along the way, the IRS requires that they pay taxes on the amount of interest they would have received each year of the bond. This interest is known as imputed interest.</p>
<p>For example, an investor buys a zero-coupon bond that has a face value of $10,000 and matures in 10 years. The investor pays $5,500 for the bond. In 10 years, she will receive $10,000, earning $4,500 in interest income. For tax purposes, the gain of $4,500 is averaged over 10 years, so each year the investor would claim $450.00 in interest income.</p>
<p>There are advantages to investing in these types of bonds. You can buy a zero-coupon bond at a deep discount. If you're saving for a child's college, you can buy a bond today and know exactly how much it will be worth when tuition is due.</p>
