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What Factors Affect Imputed Interest Rates?

Osmand Vitez
Osmand Vitez

Imputed interest rates are simply an estimate a company can use when making business decisions. The purpose for these rates is to have a more real assessment of various securities or to estimate a rate when none currently exist. A few different factors may affect imputed interest rates, such as supply and demand, security type, and the type of transaction in which an interest rate is needed. Business analysts or accountants may be among the individuals who help a company determine these rates. Outside sources may also be necessary if the transaction is very complex or involves specific rules.

In free markets, supply and demand is often the single greatest tool that governs the market. Imputed interest rates are no less susceptible to the law of supply and demand than any other item in the market. For example, a truly free market will have no single body that sets interest rates for investments or other items. Therefore, a company needs to create an interest rate. Setting imputed interest rates must take into account the number of willing buyers under current market conditions.

Man climbing a rope
Man climbing a rope

Supply can also affect an imputed interest rate. When many companies issue a similar bond, buyers have many items to choose from. A company issuing a new bond may need to change the item issued or the terms in order to encourage buyers to purchase the investment.

Different securities and other items often have different imputed interest rates. For example, different interest rates often exist for standard loans, bonds, and annuities. When attempting to use an estimated interest rate, companies must be able to use a rate associated with the particular security. For instance, a company that attempts to use a bond rate for an annuity is typically an improper process. Companies will certainly be unable to justify this interest rate usage when reviewed by auditors or other regulators.

The last major factor for imputed interest rates is the type of transaction. In all transactions, the financial figures play an important role, such as price, interest rate, and length, among other items. In some cases, domestic imputed interest rates may also be vastly different from those rates used when reviewing international transactions. Highly complex transactions may also have different steps for imputed interest rates, meaning the rate changes under different conditions. Either way, the transaction type can be a great influence on how the company decides to act.

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